Personal Savings Allowance 2026/27: GBP 1,000/GBP 500/GBP 0 and How Bank Interest is Taxed

Personal Savings Allowance (PSA): How it works

The Personal Savings Allowance (PSA) is a tax-free allowance on savings interest that varies by tax band. Each year, you can earn a certain amount of interest without paying tax.

PSA by tax band (2026/27)

Basic rate taxpayer example:

• Savings account balance: GBP 50,000
• Interest rate: 3.5%
• Annual interest: GBP 1,750
• PSA: GBP 1,000 (tax-free)
• Taxable interest: GBP 750
• Tax at 20%: GBP 150
• Net interest: GBP 1,600

Higher rate taxpayer example:

• Savings account balance: GBP 50,000
• Interest rate: 3.5%
• Annual interest: GBP 1,750
• PSA: GBP 500 (tax-free)
• Taxable interest: GBP 1,250
• Tax at 40%: GBP 500
• Net interest: GBP 1,250

Additional rate taxpayer example:

• Savings account balance: GBP 50,000
• Interest rate: 3.5%
• Annual interest: GBP 1,750
• PSA: GBP 0 (no allowance)
• Taxable interest: GBP 1,750 (all taxable)
• Tax at 45%: GBP 788
• Net interest: GBP 962

PSA is combined, not per account

The PSA is a single annual allowance that applies across all your savings accounts. You cannot claim GBP 1,000 per account -- it is GBP 1,000 total from all accounts combined.

Example: Multiple accounts

• Account A (NS&I Direct Saver): GBP 600 interest
• Account B (High Street Bank): GBP 300 interest
• Account C (Building Society): GBP 200 interest
• Total interest: GBP 1,100

With a GBP 1,000 PSA (basic rate):

• Tax-free interest: GBP 1,000
• Taxable interest: GBP 100
• Tax at 20%: GBP 20

The PSA covers the first GBP 1,000 across all accounts, and only the GBP 100 excess is taxed.

Starting Rate for Savings (SRS): Additional allowance

In addition to the PSA, there is a Starting Rate for Savings (SRS) of GBP 5,000. This applies if your non-savings income is below a certain threshold.

SRS eligibility (2026/27)

Non-savings income threshold: GBP 17,570

The SRS applies if your non-savings income (salary, pension, self-employment profit) is below GBP 17,570.

Non-savings income types:

• Employment income (salary, bonus, benefits)
• Self-employment profits
• Pension income (state pension, occupational pension)
• Rental income
• Dividend income (above dividend allowance)

NOT counted as non-savings income:

• Savings account interest
• Premium Bond prizes
• ISA interest
• Investment income (generally)

SRS calculation (if eligible)

If eligible for SRS:

1. SRS allowance: GBP 5,000 (first GBP 5,000 savings interest is taxed at 0%)
2. Then PSA: GBP 1,000 (basic rate) or GBP 500 (higher rate) applies
3. Above both: Interest taxed at marginal rate

Example: Retired person with no employment income

• State pension: GBP 12,000 (non-savings income)
• Non-savings income below GBP 17,570 threshold
• Eligible for SRS

Savings interest breakdown:

• First GBP 5,000: Taxed at 0% (SRS band)
• Next GBP 1,000: Taxed at 0% (basic rate PSA)
• Above GBP 6,000: Taxed at 20% (basic rate)

Total tax-free interest: GBP 6,000 (SRS + PSA combined)

This is significantly higher than the GBP 1,000 PSA alone, and helps retired people with modest income.

How are savings accounts taxed automatically?

Most taxpayers do not have to complete a Self Assessment tax return for savings interest. Instead, HMRC and the banks handle the tax collection automatically via the tax code system.

How it works

1. Bank reports interest: Your bank reports annual interest to HMRC under Common Reporting Standard
2. HMRC adjusts tax code: If interest exceeds PSA, HMRC reduces your Personal Tax Allowance or increases tax code (P coding)
3. Tax collected via payroll: If you are employed, tax is collected from your salary via PAYE
4. Self-employed: You report interest on Self Assessment and pay tax with other tax liabilities

Example: Employed person with GBP 40,000 salary

• Savings interest: GBP 1,300
• PSA (basic rate): GBP 1,000
• Taxable interest: GBP 300
• Tax owing: GBP 60

HMRC adjusts your tax code, and an extra GBP 60 is collected from your March payroll (or April if you are on monthly payroll).

Self Assessment reporting threshold

Even if your interest falls within the PSA, you must file Self Assessment if:

• Savings interest exceeds GBP 10,000 in a single tax year (regardless of PSA coverage)
• You are self-employed (automatic SA filing)
• You have multiple income sources requiring SA

If your interest is GBP 8,000 but your PSA covers it (so no tax is due), you do NOT need to file SA.

If your interest is GBP 12,000 and PSA covers the tax (so no tax is due), you MUST file SA because interest exceeded GBP 10,000 threshold.

Premium Bond prizes: Tax treatment

Premium Bond prizes are completely tax-free and do NOT count toward the PSA.

Why Premium Bonds are tax-free

Premium Bond prizes are winnings (not interest), and gambling winnings in the UK are tax-free. There is no income tax, capital gains tax, or national insurance on Premium Bond prizes.

Example:

• Win GBP 10,000 Premium Bond prize: GBP 10,000 tax-free (not counted toward PSA)
• Have GBP 1,500 in savings account interest
• PSA (basic rate): GBP 1,000
• Taxable interest (only): GBP 500
• Premium Bond prize does NOT affect PSA

This makes Premium Bonds particularly attractive for higher-rate taxpayers who want tax-free returns (and no interaction with the PSA).

ISA interest: Tax-free savings

ISA interest is completely tax-free under the ISA wrapper and does NOT count toward the PSA.

ISA allowance (2026/27)

• Annual allowance: GBP 20,000 across all ISAs (cash ISA + stocks & shares ISA combined)
• Interest earned in ISA: Completely tax-free, no tax return needed
• PSA interaction: Does NOT count toward PSA (ISA is tax-free at source)

Example: Cash ISA at 4.5%

• Cash ISA balance: GBP 20,000
• Annual interest: GBP 900
• Tax: GBP 0 (tax-free under ISA)
• Does NOT count toward PSA

Using your full GBP 20,000 annual ISA allowance with a cash ISA earning 4.5% gives you GBP 900 tax-free interest that does NOT reduce your PSA.

ISA vs standard savings comparison (basic rate taxpayer)

Both give the same result for a basic rate taxpayer (PSA covers the tax anyway).

ISA vs standard savings comparison (higher rate taxpayer)

Again, for higher-rate taxpayers, ISA and standard savings result is the same (but only because PSA is generous enough). On larger balances, ISA becomes more valuable.

Example: GBP 100,000 at 3.5%

• Standard savings interest: GBP 3,500
• PSA (higher rate): GBP 500
• Taxable interest: GBP 3,000
• Tax at 40%: GBP 1,200
• Net: GBP 2,300

vs.

• Cash ISA interest: GBP 3,500
• Tax: GBP 0
• Net: GBP 3,500

ISA saves GBP 1,200 in tax (same effective rate difference applies for any amount above PSA threshold).

Offshore savings accounts: Tax treatment

Interest from offshore savings accounts (held overseas, e.g., Jersey, Isle of Man, Irish banks) is taxed the same way as UK savings: PSA applies normally.

Reporting offshore accounts

Banks and financial institutions in jurisdictions with Common Reporting Standard agreements report account holders and balances to HMRC annually.

Jurisdictions with reporting:

• ✓ Isle of Man, Jersey, Guernsey
• ✓ Ireland
• ✓ Switzerland
• ✓ Cayman Islands
• ✓ Most OECD countries

Your offshore interest is automatically reported to HMRC and taxed via the tax code system (same as UK accounts).

When to use offshore accounts

Offshore accounts may be useful if you:

• Hold currency overseas (Euro or USD savings accounts)
• Are a non-resident and have special circumstances
• Use an offshore investment account (investment returns, not pure savings interest)

But for tax purposes, there is no advantage to offshore savings accounts -- PSA applies the same, and the interest is reported to HMRC automatically.

Practical strategies: Maximizing tax-free savings

Strategy 1: Use your PSA allowance

Ensure your savings are generating at least the PSA amount before looking at ISAs.

Example: Basic rate taxpayer with GBP 100,000 savings

• In NS&I Direct Saver at 3.25%: GBP 3,250 interest
• PSA allowance: GBP 1,000
• Taxable: GBP 2,250
• Tax due: GBP 450

You are NOT maximizing the tax allowance. You have room for more savings interest.

Strategy 2: Fill your ISA allowance

After using PSA, your next GBP 20,000 of savings should go into a cash ISA (earns the same rate, but tax-free).

Revised strategy:

• ISA (cash): GBP 20,000 at 4.5% = GBP 900 (tax-free)
• Standard savings: GBP 80,000 at 3.25% = GBP 2,600 interest
• PSA covers: GBP 1,000
• Taxable: GBP 1,600
• Tax due: GBP 320

You've used your full PSA and filled ISA, reducing tax to GBP 320 (vs GBP 450 without ISA strategy).

Strategy 3: Consider premium bonds for additional savings

If you have savings above GBP 20,000 + remaining gap to generate full PSA:

• ISA: GBP 20,000 (GBP 900 tax-free interest)
• Standard savings: GBP 30,000 (GBP 975 interest, within PSA)
• Premium Bonds: GBP 50,000 (GBP 2,000 expected prize, tax-free)

Total interest/prizes: GBP 3,875 (mostly tax-free)

Strategy 4: Multi-account structure (basic strategy)

For GBP 100,000 in savings:

1. Cash ISA: GBP 20,000 (annual allowance limit)

   • Rate: 4.5%
   • Interest: GBP 900 (tax-free)

2. NS&I Direct Saver: GBP 30,000 (to fill PSA)

   • Rate: 3.25%
   • Interest: GBP 975 (within GBP 1,000 PSA)

3. Premium Bonds: GBP 50,000 (maximum holding)

   • Expected prize: GBP 2,000 (tax-free)

Total expected return: GBP 3,875 (largely tax-free)

How to check if you owe tax on savings interest

If employed (PAYE)

1. Check your P60 (annual payslip summary) -- tax code section shows if savings adjustment made
2. If savings interest is material, HMRC will adjust your tax code for next year
3. You do NOT need to file SA unless interest exceeds GBP 10,000 or PSA doesn't cover tax

If self-employed

1. You MUST file Self Assessment (automatic requirement)
2. Include all savings interest in the return (even if within PSA)
3. PSA is applied by HMRC when calculating tax liability

If retired (state pension only, no employment)

1. Check your P60 from state pension provider
2. If savings interest is material, HMRC adjusts tax code
3. You do NOT need to file SA unless interest exceeds GBP 10,000

Summary and tax-efficient approach

The PSA of GBP 1,000 (basic rate) or GBP 500 (higher rate) provides meaningful tax-free savings interest. Key strategies to minimize savings tax:

1. Use your full PSA: Ensure savings generate at least PSA amount
2. Fill your ISA allowance: GBP 20,000 annually in cash ISA (tax-free at source)
3. Use Premium Bonds for additional funds: Tax-free prizes, no PSA interaction
4. For higher-rate taxpayers: ISAs become valuable (full GBP 20,000 in ISA saves more tax)
5. Report earnings > GBP 10,000: File Self Assessment if required by threshold

A basic rate taxpayer with GBP 100,000 in savings can expect GBP 3,000-3,500 annual interest/prizes with minimal tax, using the strategies above.

Use the

to model your specific savings interest and tax liability based on your tax band.