Pillar Guide · Updated June 2026

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

With savings rates higher than in recent years, far more people now pay tax on their interest. The Personal Savings Allowance gives basic-rate taxpayers GBP 1,000 of tax-free interest, higher-rate taxpayers GBP 500, and additional-rate taxpayers nothing. On top of that, lower earners can use the GBP 5,000 starting rate for savings. This guide explains how the allowances work, how interest is taxed, what counts, the role of the Cash ISA, spousal planning, and two worked examples.

Last updated: 10 June 2026Last reviewed: 10 June 2026How we verify

Key savings-interest figures -- 2026/27

Basic-rate Personal Savings Allowance: GBP 1,000
Higher-rate Personal Savings Allowance: GBP 500
Additional-rate Personal Savings Allowance: nil
Starting rate for savings: up to GBP 5,000 at 0%
Tax on excess interest: 20% / 40% / 45% by band
Cash ISA interest: always tax-free (GBP 20,000 limit)

The Personal Savings Allowance

The Personal Savings Allowance (PSA) lets you earn a set amount of savings interest each year without paying tax. The amount depends on your highest income tax band: GBP 1,000 for basic-rate taxpayers, GBP 500 for higher-rate taxpayers, and nil for additional-rate taxpayers earning above GBP 125,140.

The PSA is technically a 0% rate band rather than an exemption, so the interest still counts when working out your overall income. It applies to taxable interest only; interest inside a Cash ISA is separate and always tax-free.

The Starting Rate for Savings

In addition to the PSA, there is a starting rate for savings: a 0% band of up to GBP 5,000 of interest. It is aimed at people with low earned income but meaningful savings.

The catch is that it is reduced pound for pound by your non-savings income above the GBP 12,570 personal allowance. So if your salary or pension exceeds your personal allowance by GBP 5,000 or more, the starting rate is gone. Someone with little or no earned income, living mainly off savings, could enjoy the full GBP 5,000 band plus their personal allowance and PSA on top.

How Interest Is Taxed

Banks and building societies pay interest gross, with no tax deducted at source. Interest above your allowances is then taxed at your marginal income tax rate: 20% for basic-rate, 40% for higher-rate and 45% for additional-rate taxpayers.

Savings interest is stacked above non-savings income but below dividends when deciding which band it falls in. For most people HMRC collects any tax due automatically by adjusting the PAYE tax code, using interest figures reported by banks after the tax year ends. Larger or more complex cases may go through Self Assessment.

What Counts as Savings Interest

Taxable savings income includes:

Interest from bank and building society accounts.
Interest distributions from certain bond-based funds.
Interest on government gilts and corporate bonds.
Peer-to-peer lending interest.
Most credit union dividends.

It does not include interest within a Cash ISA, Premium Bond prizes (which are tax-free), or share dividends (taxed under separate rules). Identifying which income is savings interest matters, because only that income uses the PSA and starting rate.

The Cash ISA and Spousal Planning

Interest inside a Cash ISA is permanently tax-free and never uses your PSA or starting rate, which makes it especially valuable once you have exceeded your allowance, or for additional-rate taxpayers with no PSA. The ISA subscription limit is GBP 20,000 for 2026/27.

Spreading savings between spouses or civil partners is another effective approach. Each partner has their own PSA, and a non-earning partner may also access the starting rate for savings. Moving cash to the partner with the larger allowance and lower band can cut the family tax bill, provided the transfer is a genuine gift.

Why Rising Rates Create Bills

When savings rates were near zero, the PSA covered almost everyone. Higher rates mean the same balance generates more interest, so many savers who never paid tax on interest now find HMRC adjusting their code.

For instance, GBP 25,000 earning 4.5% produces GBP 1,125 of interest, just over the basic-rate GBP 1,000 PSA. Moving balances into a Cash ISA, or using a lower-band spouse, can restore tax efficiency without reducing the return you earn.

Worked Examples

Example 1 -- basic-rate saver above the allowance. Ravi earns a salary of GBP 35,000 (a basic-rate taxpayer) and receives GBP 1,400 of savings interest outside an ISA. His starting rate for savings is fully used up by his salary.

Interest received: GBP 1,400
Less Personal Savings Allowance (basic rate): GBP 1,000 at 0%
Taxable interest: GBP 400
Tax: GBP 400 x 20% = GBP 80
Total tax on interest: GBP 80

Example 2 -- low earner using the starting rate. Margaret has a small pension of GBP 14,570 (GBP 2,000 above her personal allowance) and receives GBP 4,000 of savings interest. Her starting rate of GBP 5,000 is reduced by the GBP 2,000 of income above her allowance, leaving GBP 3,000.

Starting rate for savings available: GBP 5,000 - GBP 2,000 = GBP 3,000 at 0%
Personal Savings Allowance (basic rate): GBP 1,000 at 0%
Total tax-free interest: GBP 3,000 + GBP 1,000 = GBP 4,000
Taxable interest: GBP 4,000 - GBP 4,000 = GBP 0
Total tax on interest: GBP 0

The contrast shows how the starting rate can shelter substantial interest for those with low earned income. Use the savings calculator to estimate your interest and check it against your allowances.

Frequently Asked Questions

How much savings interest can I earn tax-free in 2026/27?

It depends on your income tax band. The Personal Savings Allowance lets basic-rate taxpayers earn GBP 1,000 of savings interest tax-free, higher-rate taxpayers GBP 500, and additional-rate taxpayers get no allowance at all. On top of this, lower earners may also benefit from the starting rate for savings, which can give up to a further GBP 5,000 of tax-free interest. Interest held inside a Cash ISA is always tax-free and does not count towards these allowances. So a basic-rate saver could potentially earn well above GBP 1,000 in interest before paying tax.

What is the starting rate for savings?

The starting rate for savings is a 0% band of up to GBP 5,000 that applies to savings interest, on top of the Personal Savings Allowance. However, it is reduced by GBP 1 for every GBP 1 of non-savings income (such as salary or pension) above your personal allowance. So if your non-savings income exceeds your GBP 12,570 personal allowance by GBP 5,000 or more, the starting rate is fully used up. It mainly benefits people with low earned income but significant savings, such as some pensioners and those living off investments.

How is savings interest actually taxed?

Banks and building societies pay interest gross (without tax deducted). Any interest above your allowances is taxed at your marginal income tax rate: 20% for basic-rate, 40% for higher-rate and 45% for additional-rate taxpayers. Savings interest is stacked above non-savings income but below dividends when working out which rate applies. For most people with modest interest, HMRC collects the tax automatically by adjusting your PAYE tax code using information reported by your bank. Larger amounts may need to be declared through Self Assessment.

Show 5 more questions

Does interest inside a Cash ISA count towards my allowance?

No. Interest earned inside a Cash ISA is completely tax-free and does not use any of your Personal Savings Allowance or starting rate for savings. This makes ISAs especially valuable for savers who have already used their Personal Savings Allowance, or who are additional-rate taxpayers with no allowance at all. The annual ISA subscription limit is GBP 20,000 for 2026/27, which can be split across Cash, Stocks and Shares, and other ISA types. Sheltering interest in an ISA is the simplest way to keep it permanently tax-free.

Do I need to tell HMRC about my savings interest?

Usually not directly. Banks and building societies report the interest they pay you to HMRC after the end of the tax year. HMRC then works out any tax due and typically collects it by changing your PAYE tax code for a later year, or by sending a calculation. You only need to report interest yourself if you complete a Self Assessment return for another reason, or if HMRC asks you to. It is still wise to keep your own record of interest received, especially if you hold several accounts.

Which types of interest count towards the allowance?

Taxable savings income includes interest from bank and building society accounts, interest distributions from certain funds, interest on government and corporate bonds, peer-to-peer lending interest, and most credit union dividends. It does not include interest within a Cash ISA, certain National Savings products such as Premium Bond prizes (which are tax-free), or dividends from shares (which are taxed under separate dividend rules). Knowing which income is savings interest matters because it determines whether the Personal Savings Allowance and starting rate apply.

Why might rising interest rates create a tax bill?

When savings rates were near zero, very few people earned more than GBP 1,000 of interest, so the Personal Savings Allowance covered almost everyone. As rates rose, the same balance now generates much more interest. For example, GBP 25,000 at 4.5% produces GBP 1,125 of interest, which exceeds the basic-rate GBP 1,000 allowance. Many savers who never paid tax on interest before now find HMRC adjusting their tax code. Moving savings into a Cash ISA, or using a spouse with a lower band, can restore tax efficiency.

Can my spouse help me reduce tax on savings interest?

Yes. Each spouse or civil partner has their own Personal Savings Allowance and, potentially, their own starting rate for savings. Moving savings into the name of a lower-earning partner can make use of their larger allowance and lower tax rate. A higher-rate taxpayer with GBP 500 of allowance can shift cash to a basic-rate partner with GBP 1,000 of allowance, or to a non-earning partner who may also access the GBP 5,000 starting rate. The transfer must be a genuine gift; the income then belongs to the recipient.

Calculators for this topic

Compound Interest tool

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About the author

Emma Clarke

UK Tax Writer

Emma Clarke has been writing about UK personal tax since 2018, with a particular focus on Self Assessment, PAYE coding and the practical mechanics of how HMRC actually applies the rules to ordinary salaries. Her work concentrates on translating the dense language of HMRC manuals and Finance Act schedules into worked examples that show, pound by pound, how income tax and National Insurance reduce a gross salary to the figure that lands in a UK bank account. Emma covers the full PAYE lifecycle: tax codes (1257L, BR, K codes, emergency codes), the Marriage Allowance, the High Income Child Benefit Charge, salary sacrifice arrangements and their effect on pensionable pay, the Apprenticeship Levy, and the differences between the rUK and Scottish income-tax regimes. She is particularly interested in the edge cases that catch PAYE employees out — the £100,000 personal-allowance taper, the 60% effective marginal rate it creates, and the interaction between student-loan plans and pension contributions. Every figure in Emma's articles is verified against the current HMRC rates pages and worked through a Self Assessment calculation by hand before publication. She writes to CalcHub's editorial standards: primary-source citations, plain English, no promotional language, and clear "this is general information, not financial advice" disclaimers where appropriate.

Personal-finance writer since 2018
UK tax specialism — PAYE, Self Assessment, National Insurance
Writes to CalcHub editorial standards (primary-source citation, annual review)

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Last updated: 10 June 2026How we verify

Disclaimer: This guide reflects UK savings interest tax rules for 2026/27as of June 2026 and is general information, not financial advice. Your position depends on your full income. See gov.uk: Tax on savings interest for HMRC guidance.