The £5,000 Starting Rate Band for Savings Interest 2026/27

One of the least-claimed tax reliefs in the UK is the starting rate band for savings -- a 0% tax rate on up to £5,000 of savings interest that is available to anyone whose non-savings income falls below a threshold. Millions of people, particularly retirees with modest pensions and people in part-time work, pay unnecessary tax on their savings interest every year simply because they are unaware the relief exists. Understanding whether you qualify could be worth several hundred pounds a year.

How the starting rate band works

The UK income tax system layers different types of income in a specific order. Non-savings income (wages, pension, rental income, self-employment profit) sits at the bottom of the stack. Savings income (interest from bank accounts, building society accounts, NS&I products) sits above that. Dividend income sits on top.

The starting rate band of £5,000 sits above the Personal Allowance. It allows savings interest to be taxed at 0% -- but only if there is room in the band after your non-savings income has been allocated.

Here is how the allocation works:

1. Non-savings income uses up the Personal Allowance first (£12,570 in 2026/27).
2. Any non-savings income above the Personal Allowance eats into the starting rate band, £1 for £1.
3. Whatever starting rate band remains after step 2 is available for savings interest at 0%.
4. The Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate) then applies to any remaining savings income above the starting rate band.

The result is that the starting rate band is only fully available if all your non-savings income is covered by the Personal Allowance -- that is, if your wages, pension and other non-savings income do not exceed £12,570.

Who benefits

The profile of a typical beneficiary:

• A retiree with a State Pension of £11,500 per year and £30,000 in savings earning 4.5% interest (£1,350/year). Their non-savings income (£11,500) is below the Personal Allowance, leaving the full £5,000 starting rate band available. Their £1,350 interest falls within the starting rate band -- no tax on savings interest at all. Plus, the PSA gives them £1,000 more tax-free interest, so in practice up to £6,000 of interest is 0%.

• A part-time worker earning £14,000 per year. Their non-savings income above the Personal Allowance is £1,430 (£14,000 minus £12,570). The starting rate band is reduced by £1,430, leaving £3,570 of starting rate available. Their first £3,570 of savings interest is taxed at 0%, plus £1,000 under the PSA. The first £4,570 of their savings interest is effectively tax-free.

• A full-time worker earning £32,000 per year. Their non-savings income above the Personal Allowance is £19,430 -- well above the £5,000 limit for the starting rate band. No starting rate band is available. Only the PSA (£1,000 tax-free) applies to their savings interest.

The Personal Savings Allowance: how it interacts

The Personal Savings Allowance (PSA) was introduced in April 2016. It gives:

• Basic-rate taxpayers: £1,000 of savings interest tax-free.
• Higher-rate taxpayers: £500 of savings interest tax-free.
• Additional-rate taxpayers: £0 (no PSA).

The PSA operates independently of the starting rate band. They stack together. So a basic-rate taxpayer who also has some starting rate band available can receive:

• Up to £5,000 at 0% (starting rate band).
• Plus up to £1,000 at 0% (PSA).
• Total: up to £6,000 of savings interest completely tax-free.

Any savings interest above these two allowances combined is taxed at the basic rate (20% for 2026/27).

The interaction with ISAs

Cash ISA and Stocks and Shares ISA interest and returns are completely outside the income tax system. They do not count towards your non-savings income or your savings income for any of these allowance calculations.

This means if you hold both ISA savings and taxable savings accounts, only the taxable accounts are affected by the starting rate band and PSA calculations. Moving money from taxable accounts into an ISA reduces your taxable savings interest and can preserve more of your starting rate band for other savings.

For 2026/27, you can contribute up to £20,000 per year into ISAs (any combination of cash, stocks and shares, Innovative Finance ISA). With rising interest rates in recent years, the value of sheltering savings in an ISA has increased substantially.

How to claim a refund

If you have paid tax on savings interest that should have been covered by the starting rate band, HMRC will not automatically refund you. You need to claim.

If you are in Self Assessment: declare your savings interest in your tax return. The starting rate band calculation is built into the self-assessment computation, and any overpayment will reduce your tax bill or generate a refund.

If you are not in Self Assessment: use form R40 (Claim for repayment of tax deducted from savings and investments). This is available on gov.uk and can be submitted online or by post. You can claim back overpaid tax for up to 4 previous tax years, so in 2026/27 you can claim back to 2022/23.

A common scenario: retirees with the State Pension

The new State Pension in 2026/27 is approximately £11,500 per year for someone with a full National Insurance record (35+ qualifying years). This is £1,070 below the Personal Allowance of £12,570.

That means:

• Non-savings income: £11,500 (State Pension).
• Remaining Personal Allowance: £1,070 unused.
• Starting rate band: fully available (£5,000).
• PSA: £1,000.
• Total tax-free savings interest: up to £6,000 per year.

At current savings rates of around 4-5% for easy access accounts, this corresponds to roughly £120,000-£150,000 in a taxable savings account before any interest becomes taxable. For a retiree with, say, £50,000 in savings, their interest would be entirely tax-free under the combined starting rate band and PSA -- yet many pay tax unnecessarily because they are unaware of these allowances.

If the retiree also has a small occupational pension of, say, £3,000 per year, their total non-savings income rises to £14,500. This uses up £1,930 of the starting rate band (£14,500 minus £12,570), leaving £3,070 of starting rate band for savings interest. Together with the £1,000 PSA, up to £4,070 of savings interest is still 0% taxed.

Why it goes unclaimed

There are several reasons this relief is widely unclaimed:

• Many people are not aware it exists -- it receives far less publicity than the ISA allowance or the Personal Savings Allowance.
• People who have been paying income tax for decades do not think of themselves as potentially having a 0% tax rate on any income.
• In the years when interest rates were very low (2009-2022), most savers had negligible interest income and the relief was academic.
• The mechanics of non-savings income 'eating into' the starting rate band are not intuitive.

With savings rates now materially higher than the near-zero environment of the preceding decade, the starting rate band has regained significant practical value for eligible taxpayers.

Sources

• HMRC: ITTOIA 2005, s7A (starting rate for savings)
• gov.uk: Tax on savings interest
• HMRC: R40 form and guidance
• gov.uk: Personal Savings Allowance