Guide · Savings & Tax
UK Tax on Savings Interest: PSA, Starting Rate & How HMRC Collects It
Most UK adults pay no tax on their savings interest. Between the Personal Savings Allowance, the starting rate for savings and the ISA wrapper, a basic-rate taxpayer can shelter several thousand pounds of interest before HMRC takes a penny. This guide walks through every rule, how they stack, and what HMRC does if you exceed your allowance.
- Cash ISA interest: always tax-free, no limit reporting needed.
- Personal Savings Allowance: £1,000 basic rate, £500 higher rate, £0 additional rate.
- Starting rate for savings: up to £5,000 at 0%, but tapers away if other income exceeds £12,570.
- How HMRC collects: banks report, HMRC adjusts your tax code next year — no Self Assessment needed for most.
Personal Savings Allowance (PSA)
Introduced in April 2016, the Personal Savings Allowance is a band of interest taxed at 0%. How much you get depends on your highest rate of tax for the year — not how much you earn:
| Your highest tax rate | Income band (rUK, 2025/26) | PSA |
|---|---|---|
| Basic rate (20%) | £12,571 – £50,270 | £1,000 |
| Higher rate (40%) | £50,271 – £125,140 | £500 |
| Additional rate (45%) | Above £125,140 | £0 |
Crucially, "highest tax rate" is determined afteradding your savings interest to your other income. So a salary of £49,000 + £2,000 of interest would push £730 of interest into the higher-rate band — meaning your PSA effectively drops from £1,000 to £500 for that year. This is the "interest cliff edge" that catches many savers in retirement.
Starting rate for savings (£5,000)
On top of the PSA, there is a separate "starting rate for savings" band of up to £5,000 taxed at 0%. But it is only available if your other income (employment, pension, rental, dividends) is below £17,570. For every £1 of non-savings income above the £12,570 personal allowance, you lose £1 of the £5,000 starting rate band.
| Other income | Starting rate band | Plus PSA | Total tax-free interest |
|---|---|---|---|
| £0 (no other income) | £5,000 | £1,000 | £18,570 (PA £12,570 + £5,000 + £1,000) |
| £12,570 (uses full PA) | £5,000 | £1,000 | £6,000 |
| £15,000 | £2,570 | £1,000 | £3,570 |
| £17,570 or more | £0 (fully tapered) | £1,000 (if basic rate) | £1,000 |
This makes the starting rate especially valuable for retirees with a small State Pension and large savings, or people with a sabbatical year. A typical State Pension (about £11,973 for 2025/26) leaves nearly the full £5,000 starting rate intact.
ISAs — separate from everything above
Interest earned inside any ISA wrapper (Cash, Stocks & Shares, Innovative Finance, LISA) is completely outside the tax system. It never counts towards the PSA, never tapers the starting rate, never appears on a tax return. The 2025/26 ISA allowance is £20,000 across all wrappers, frozen since 2017.
For higher-rate and additional-rate taxpayers, the ISA wrapper is now strictly more valuable than taxable savings. At a 4% rate of return, £20,000 of interest is £800/year — that fully consumes a higher-rate taxpayer's £500 PSA and leaves £300 taxable at 40% (£120 of tax) if held outside an ISA.
Scottish taxpayers
Important nuance: Scotland sets its own income tax bands on non-savings income — but the PSA and starting rate are reserved (UK-wide) provisions. So a Scottish taxpayer's PSA is determined by the rUK band their savings incomefalls into, even if their salary is taxed at a Scottish rate. In practice this means most Scottish higher-rate taxpayers (Scotland's threshold is £43,663 vs rUK £50,270) still get the full £1,000 PSA, because their savings income is treated against the rUK higher-rate threshold.
How HMRC collects the tax
Since April 2016 banks pay interest gross — no tax is deducted at source. HMRC instead collects in arrears:
- April – May: banks report all interest to HMRC for the tax year just ended.
- July – August: HMRC calculates your liability if you exceeded your PSA.
- HMRC adjusts your tax code for the following tax year to recoup the tax — you see a smaller take-home pay.
- If you don't have a PAYE income (retired, self-employed), HMRC issues a simple assessment letter.
You only need to self-declare via Self Assessment if you have more than £10,000 of interest in a tax year (the threshold above which HMRC requires SA). Below that, just let HMRC do the maths.
Common scenarios
Scenario A — Basic-rate employee, £40k salary, £30k savings @ 4%
Interest: £1,200. PSA: £1,000. Taxable: £200 × 20% = £40 of tax. HMRC adjusts the tax code the following year to collect it.
Scenario B — Higher-rate professional, £75k salary, £100k savings @ 4%
Interest: £4,000. PSA: £500. Taxable: £3,500 × 40% = £1,400 of tax. Moving £20k into a Cash ISA cuts annual tax by £320 — repayable from a single year's allowance.
Scenario C — Retiree, £14k pension, £150k savings @ 4%
Interest: £6,000. Other income £14,000 leaves £3,570 of starting rate band (£17,570 − £14,000). Starting rate covers £3,570, PSA covers another £1,000 → £4,570 tax-free. Taxable: £1,430 × 20% = £286 of tax. This is the high-impact case where retirees rarely realise how much of their interest is shielded.
Joint accounts
Interest on jointly held accounts is split 50/50 by default, with each holder counting their share against their own PSA and starting rate. This makes joint accounts efficient for couples with one partner in a lower tax band. For unequal beneficial ownership, you can elect a different split via HMRC form 17 (assets must be held jointly but in unequal proportions).
What counts as "savings interest"?
- Bank and building society interest (current, savings, fixed-rate bonds)
- Credit union dividends and share interest
- NS&I products except Premium Bonds (tax-free) and tax-free certificates
- Peer-to-peer lending platform interest
- Government and corporate bond interest (gilts have special treatment for CGT but interest is taxable)
- Authorised investment fund interest distributions
- Purchased life annuity income (income element)
Dividend income, equity gains and rental income do not count as savings interest — they have their own allowances and rates.
Frequently asked questions
- Do I pay tax on Cash ISA interest?
- No. Interest earned inside any ISA — Cash, Stocks & Shares, Innovative Finance or LISA — is completely tax-free and does not count towards your Personal Savings Allowance. ISA interest never appears on your tax return.
- What is the Personal Savings Allowance for 2025/26?
- Basic-rate taxpayers (income up to £50,270) get £1,000. Higher-rate taxpayers (£50,271 – £125,140) get £500. Additional-rate taxpayers (above £125,140) get £0. These amounts have been unchanged since the PSA was introduced in April 2016.
- How does the £5,000 starting rate for savings work?
- If your non-savings, non-dividend income is below £17,570, you can earn up to £5,000 of savings interest at a 0% rate before the PSA even applies. For every £1 of other taxable income above £12,570, you lose £1 of the £5,000 band. It is fully used up at £17,570 of other income.
- How does HMRC know about my interest?
- UK banks and building societies report all interest paid to HMRC each year. If you owe tax, HMRC usually collects it by adjusting your tax code the following year — you do not need to file Self Assessment just because you exceeded the PSA, unless you have other reasons to.
- Do I need to declare interest if it is below the PSA?
- No. If your total interest is below your PSA threshold, no tax is due and you do not need to do anything. HMRC still receives the data from your bank but no tax is collected.
- When does interest count? Is it when paid or accrued?
- For HMRC, savings interest is taxable in the tax year it becomes available to you (i.e., when it is credited to your account or otherwise made available). Fixed-term bonds that pay all interest on maturity often produce a large taxable sum in one year — even if you locked the money in years earlier.
- Can I claim back tax wrongly deducted from my interest?
- Yes. Since April 2016 banks pay interest gross (no tax deducted), so this is rare. However, certain bonds, NS&I products or older accounts may still have deducted tax. Use form R40 to reclaim — and you have 4 years from the end of the tax year to do so under the overpayment relief rules.