Tax on Savings Interest 2026/27: Personal Savings Allowance Explained

For most of the 2010s, savings rates were so low that tax on interest was barely worth thinking about. That has changed dramatically. With many easy-access accounts now paying above 4%, a significant number of savers are exceeding their Personal Savings Allowance and facing unexpected tax bills. Here is what you need to know for 2026/27.

What Is the Personal Savings Allowance?

The Personal Savings Allowance (PSA) was introduced in 2016 and allows most savers to earn a certain amount of interest tax-free each year. The amount depends on your income tax band:

• Basic-rate taxpayers (income up to GBP 50,270): GBP 1,000 PSA
• Higher-rate taxpayers (income GBP 50,271 to GBP 125,140): GBP 500 PSA
• Additional-rate taxpayers (income above GBP 125,140): GBP 0 PSA

The PSA applies to interest from bank accounts, building society accounts, credit union deposits, peer-to-peer lending, gilts, and most bonds. It does not apply to interest earned inside an ISA -- ISA interest is always tax-free and sits outside the PSA entirely.

Why More People Are Being Caught Out

At a 4% interest rate, a basic-rate taxpayer exhausts their GBP 1,000 PSA with a savings balance of GBP 25,000. At 5%, the threshold drops to GBP 20,000. For higher-rate taxpayers with only a GBP 500 allowance, the crossover point is GBP 12,500 at 4%.

A few years ago, you would have needed a very large balance to breach these limits. Now it is a realistic problem for ordinary savers with cash ISA alternatives or emergency funds sitting in high-yield accounts.

Once you exceed the PSA, the excess interest is taxed at your marginal rate -- 20% for basic-rate taxpayers and 40% for higher-rate taxpayers.

How HMRC Collects the Tax

If you are employed and the amount of tax owed is modest, HMRC typically adjusts your PAYE tax code to collect it. You may receive a notice showing a reduction in your tax code -- this is HMRC recouping the unpaid tax on your savings interest through a lower monthly salary.

If you are already registered for Self Assessment, you declare savings interest on your tax return. If your total untaxed income (including savings interest) exceeds GBP 10,000 in a tax year, you are required to register for Self Assessment if you are not already on it.

Banks and building societies report interest paid to HMRC automatically, so it is not something you can easily overlook or forget to declare.

The Starting Rate for Savings

There is an additional allowance that often goes unnoticed: the starting rate for savings, set at 0% on up to GBP 5,000 of savings income. However, this only benefits you if your non-savings income (typically employment or self-employment income) falls below GBP 17,570.

For every pound of non-savings income above the Personal Allowance of GBP 12,570, the GBP 5,000 starting rate band shrinks by one pound. If your salary or other income exceeds GBP 17,570, the starting rate is unavailable. It is primarily useful for those with very low earnings -- retirees drawing a modest pension, for instance, or students with part-time income.

ISAs vs Taxable Accounts: The Strategic Choice

Given that ISA interest is always tax-free, the question for savers is how to prioritise. The ISA allowance in 2026/27 is GBP 20,000. For most people, maxing out an ISA before depositing in a taxable account is the logical move if rates are comparable.

However, many high-interest taxable accounts offer better rates than their ISA equivalents. In that case, the maths depends on how much you have saved and how close you are to your PSA limit. If you are a basic-rate taxpayer with less than GBP 25,000 in savings, a slightly better rate in a taxable account may still leave you under the PSA -- meaning the ISA premium is not needed.

Higher-rate taxpayers have a much smaller buffer and should generally prioritise their ISA earlier, especially as their PSA is only GBP 500.

Practical Steps for 2026/27

• Check how much interest your accounts paid in 2025/26. HMRC will have been notified by your bank.
• If you received a revised tax code, verify it is correct using your annual interest statements.
• Consider moving surplus savings into an ISA if you are approaching or exceeding your PSA.
• If you are required to complete a Self Assessment return, ensure you include all savings interest received.

Remember that interest on Premium Bond prizes is always tax-free and does not count against your PSA. National Savings and Investments (NS&I) products vary -- some are tax-free, others are not.

To model the effect of savings interest on your total tax bill alongside employment income, use the CalcHub Income Tax Calculator.