Tax-Free Savings Allowances 2026/27: The Four You Should Stack

Quick answer

Most people can earn a meaningful chunk of investment income each year without paying any tax, but only if they understand the four separate allowances and use them in the right order. For 2026/27 they are:

• Personal Savings Allowance: £1,000 (basic rate), £500 (higher rate), £0 (additional rate).
• Dividend allowance: £500 for everyone.
• ISA allowance: £20,000, fully tax-free.
• Starting rate for savings: up to £5,000 at 0% for those with low other income.

Used together, these can shelter a surprising amount. Model your own numbers with the

, and read on for how each one works and how to stack them.

1. The Personal Savings Allowance

The Personal Savings Allowance (PSA) lets you earn savings interest tax-free up to a limit set by your tax band:

• Basic-rate (20%) taxpayers: £1,000.
• Higher-rate (40%) taxpayers: £500.
• Additional-rate (45%) taxpayers: £0.

Interest above your PSA is taxed at your normal income tax rate. With higher savings rates in recent years, a basic-rate taxpayer hits the £1,000 ceiling on roughly £20,000–£25,000 of easy-access savings, and a higher-rate taxpayer hits £500 on about half that. Once you regularly breach the PSA, an ISA becomes the obvious next step.

The PSA covers interest from bank and building society accounts, most savings accounts, credit union accounts, and the interest element of some investments. It is applied automatically — HMRC adjusts your tax code or reconciles it after year-end — so you do not claim it, but you should check it is being applied correctly.

2. The dividend allowance

If you hold shares or funds outside an ISA, the first £500 of dividends each year is tax-free thanks to the dividend allowance. Above that, 2026/27 dividend tax rates are:

• Basic rate: 10.75%
• Higher rate: 35.75%
• Additional rate: 39.35%

The £500 allowance is far smaller than it once was, so even modest portfolios outside an ISA now generate taxable dividends. Company directors who pay themselves in dividends feel this most. Work out the tax on a given dividend with the

.

3. The ISA allowance: £20,000

The Individual Savings Account is the cleanest shelter of all. You can pay in up to £20,000 across your ISAs in 2026/27, and everything inside grows entirely free of income tax and capital gains tax. There is nothing to declare and no tax to reclaim.

Key points for 2026/27:

• The £20,000 limit covers all your ISA types combined — cash, stocks and shares, innovative finance and Lifetime ISA (the LISA has its own £4,000 sub-limit within the £20,000).
• The allowance is per person and does not roll over — unused allowance is lost at the end of the tax year.
• You can now pay into multiple ISAs of the same type in a single year, giving more flexibility to chase rates.

For a serious saver, the order is usually: fill the ISA first, because its protection is permanent and unconditional, then rely on the PSA and dividend allowance for anything held outside. See how tax-free compounding adds up over time with the

and compare ISA outcomes with the .

4. The starting rate for savings

The least-known allowance is the starting rate for savings, which lets you earn up to £5,000 of savings interest at 0% — but only if your other (non-savings) income is low.

Here is the mechanism: the £5,000 band sits just above the personal allowance, and it is reduced £1 for every £1 of non-savings income above the £12,570 personal allowance. So:

• If your only income is savings interest, you could earn £12,570 (allowance) + £5,000 (starting rate) + £1,000 (PSA) = £18,570 of interest tax-free.
• If you have a salary or pension that uses up the £5,000 band, the starting rate disappears entirely.

This makes the starting rate hugely valuable to early retirees living on savings, low-income individuals, and people in a gap year or career break, but largely irrelevant to anyone on a normal full-time salary.

How the allowances stack: a worked example

Margot, recently retired, has a small pension of £14,000 and £30,000 of savings paying 4.5% interest (£1,350) plus £900 of dividends from a non-ISA fund.

• Her pension uses her £12,570 allowance and £1,430 of taxable income above it.
• Her non-savings income exceeds the personal allowance by £1,430, so her £5,000 starting-rate band is reduced to £3,570.
• Her £1,350 of interest fits comfortably within the remaining starting-rate band and her £1,000 PSA — so it is tax-free.
• Her £900 of dividends: £500 is covered by the dividend allowance; the remaining £400 is taxed at 10.75% = about £43.

By understanding the layering, Margot pays tax on almost none of her investment income. Had her dividends been inside an ISA, even that £43 would have disappeared.

Putting it together: a simple priority order

For most people, the sensible sequence is:

1. Use your ISA for money you want permanently sheltered — it never gets used up by income changes.
2. Lean on the Personal Savings Allowance for ordinary cash savings outside the ISA.
3. Keep dividend-paying investments inside the ISA where possible, given the tiny £500 dividend allowance.
4. Check the starting rate for savings if your earned income is low — it can be transformative for early retirees.

How HMRC actually collects tax on savings interest

A practical question many people have is how tax on interest above the PSA is collected, given banks no longer deduct it at source. The answer is that banks and building societies report the interest they pay you to HMRC automatically after the end of each tax year. HMRC then:

• Adjusts your tax code to collect the tax due on interest above your allowance, usually in the following year; or
• Includes it in a Self Assessment return if you complete one; or
• Issues a P800 calculation if you are not in Self Assessment and the code cannot collect it.

This means a year of high interest can show up as a tax-code change a year later, which catches people out. If your savings have grown and rates have been strong, it is worth anticipating that a slice of last year's interest may be collected through this year's code. You can sense-check the likely tax with the

rather than waiting for a surprise adjustment.

Joint accounts and couples

For couples, allowances are a planning opportunity. Each person has their own PSA, dividend allowance, ISA allowance and (where relevant) starting rate. That means:

• Splitting savings so that interest is spread across two people uses two sets of Personal Savings Allowances.
• Holding savings in the name of the lower earner can shift interest from a 40% taxpayer (£500 PSA) to a basic-rate (£1,000 PSA) or non-taxpayer, who may also benefit from the starting rate.
• Interest on a joint account is split 50/50 for tax by default, but married couples and civil partners can elect a different split to match actual ownership.

For a higher-rate taxpayer married to a non-earner, deliberately holding the family's cash savings in the non-earner's name can wipe out the tax on interest entirely. This is one of the simplest and most legitimate forms of household tax planning.

Cash ISA vs taxable savings: when is it worth it?

With higher interest rates, a fair question is whether a cash ISA still beats a normal savings account once the PSA is taken into account. The answer depends on how much interest you earn:

• If your total interest stays comfortably within your PSA, a higher-paying taxable account can beat a lower-paying cash ISA — the tax shelter is worth nothing if you would not have paid tax anyway.
• If your interest regularly exceeds your PSA, or you expect it to as your savings grow, the ISA's permanent shelter wins, because the PSA is a fixed amount that does not grow with your balance.

The deciding factor is the after-tax rate, not the headline rate. Compare the net return of a taxable account (after your marginal rate on interest above the PSA) against the ISA rate before deciding.

Children's savings and the Junior ISA

Families have an extra shelter worth knowing about: the Junior ISA (JISA), which lets you save or invest for a child entirely tax-free, with its own annual allowance separate from the adult £20,000. There is also a tax trap to avoid with ordinary children's accounts: if a parent gifts money that generates more than £100 of interest a year for their child, that interest is taxed as the parent's, not the child's — the so-called "£100 rule". The JISA sidesteps this entirely because the income is tax-free, which makes it the natural home for larger gifts to children. Grandparents and other relatives are not caught by the £100 rule, so gifts from them can sit in ordinary children's accounts without that complication.

A note on Premium Bonds and other tax-free products

Beyond the four core allowances, a few products are tax-free in their own right and do not touch your allowances at all:

• Premium Bonds: prizes are tax-free, so they never use up your Personal Savings Allowance — useful for higher earners who have exhausted their PSA, though the effective return depends on luck and the prize rate.
• Certain National Savings products have historically offered tax-free returns.
• ISAs, of course, sit outside the tax system entirely once funded.

For a higher or additional-rate taxpayer who has used their ISA allowance and PSA, parking further cash in genuinely tax-free products can be more efficient than a taxable account where interest is taxed at 40% or 45%.

Don't let an allowance expire unused

The recurring theme across these allowances is that most of them reset each tax year and cannot be carried forward. The ISA allowance, the dividend allowance and the Personal Savings Allowance all vanish on 6 April if unused. For ISAs in particular, this is real money left on the table — a couple who each fail to use their £20,000 allowance lose £40,000 of tax-free capacity that year, permanently. A simple end-of-tax-year review, ideally in February or March, lets you top up before the deadline rather than scrambling on 5 April or missing it entirely.

Watch the wider 2026 limits

These savings allowances sit alongside other thresholds worth keeping in view: the capital gains tax allowance is just £3,000 (with gains taxed at 18% or 24%), and the personal allowance itself tapers away once income exceeds £100,000. For investors holding assets outside an ISA, the shrinking CGT and dividend allowances make the ISA's unlimited tax-free growth more valuable every year.

The bottom line

In 2026/27 you have four distinct tax-free savings allowances: the Personal Savings Allowance (£1,000/£500/£0), the £500 dividend allowance, the £20,000 ISA allowance, and the starting rate for savings worth up to £5,000 for low earners. The skill is in stacking them in the right order — ISA first, then the PSA and dividend allowance for everything else, with the starting rate as a powerful bonus for those with little other income. Model your own position with the

and the before the tax year slips away and an allowance is lost.