Pillar Guide · Updated May 2026
UK Tax on Savings Interest: PSA, Starting Rate and ISAs Explained for 2025/26
Around 22 million UK adults hold an interest-bearing savings product — easy access, fixed-rate bond, regular saver, NS&I — and as cash rates returned to 4-5% in 2024 and 2025 the question of tax on interest became unexpectedly relevant for the first time since the financial crisis. UK savers benefit from a layered system of allowances: the £1,000 / £500 / £0 Personal Savings Allowance (PSA) by band; the £5,000 Starting Rate for Savings (SRS) for low earners; and the wholly tax-free ISA wrapper for up to £20,000/year of new savings. This pillar guide explains how each layer works for 2025/26, how HMRC's order-of-income rule stacks them, what happens when you exceed the PSA, how to use Premium Bonds and Junior ISAs efficiently, and the year-end P800 reconciliation process that catches almost all UK savers automatically.
The Personal Savings Allowance
The Personal Savings Allowance (PSA) was introduced in April 2016 alongside the gross-paid interest reform that ended deduction at source by banks. It is a tax-free band of savings interest that sits on top of the Personal Allowance and is awarded based on your highest tax band. The 2025/26 figures:
| Taxpayer band | PSA (interest tax-free per year) |
|---|---|
| Basic rate (20%) — income under £50,270 | £1,000 |
| Higher rate (40%) — income £50,270-£125,140 | £500 |
| Additional rate (45%) — income above £125,140 | £0 |
The PSA is per person, so a married couple gets two PSAs (£2,000 combined at basic rate). It applies to interest from UK and most foreign bank and building society accounts, NS&I products (except the explicitly tax-free ones), corporate bonds, government gilts, peer-to-peer lending platforms, and credit unions. It does not apply to ISAs (interest already tax-free) or dividends (separate Dividend Allowance of £500 for 2025/26).
The PSA has been frozen at £1,000/£500/£0 since 2016. As cash rates have risen from 0.1% to 4-5% across that period, the practical effect has tightened sharply. A basic-rate saver could hold roughly £1,000,000 in 2020 at 0.1% before paying any interest tax (£1,000 PSA / 0.1% = £1m). By 2025 at 4.5% the same PSA covers only £22,222 of taxable savings. Higher-rate savers run into the £500 limit at just £11,111. This drives the renewed importance of ISAs as the rate-rise era continues.
The £5,000 Starting Rate for Savings
The Starting Rate for Savings (SRS) is a separate 0% band of up to £5,000 of savings interest that sits above the Personal Allowance but below the basic-rate band. Crucially, the SRS tapers by £1 for every £1 of non-savings income above the £12,570 Personal Allowance — meaning it disappears completely once your non-savings income reaches £17,570 (£12,570 + £5,000).
Stacked with the PSA, a saver with no earned income (so the full £5,000 SRS is available and they remain a basic-rate taxpayer) can earn up to £18,570 of interest tax-free: £12,570 PA + £5,000 SRS + £1,000 PSA. At 4.5% interest that supports £413,000 of taxable savings producing no tax bill. This is a remarkable shelter for non-earning retirees, students with savings, or one earner in a couple with meaningful non-pension capital.
Worked example of the SRS taper. A retiree with State Pension of £11,975/year (just over the State Pension full rate) has no SRS taper to deal with — non-savings income £11,975 is under the PA threshold of £12,570, so full £5,000 SRS available. Same retiree with State Pension £11,975 plus a small private pension of £3,000 has non-savings income £14,975 — that's £2,405 over the £12,570 trigger, so SRS taper reduces the SRS from £5,000 to £2,595 (£5,000 − £2,405). Add PSA £1,000 and the saver gets £3,595 of interest tax-free. Beyond that, the next slice is taxed at 20% basic rate.
Order-of-Income Rule
UK income tax stacks income in a fixed statutory order: non-savings income first (salary, pensions, rental income, self-employment profits), then savings income (interest), then dividend income last on top. Allowances and bands are applied in that order. The Personal Allowance of £12,570 is normally used up by non-savings income; the £5,000 SRS sits above the PA in the non-savings layer; the PSA applies to interest specifically; the £500 Dividend Allowance applies to dividends only.
This ordering matters for SRS calculation, for higher-rate threshold positioning, and for the £100,000 personal allowance taper. It does not generally let you choose to apply allowances in a different order — HMRC's self assessment system enforces the stack automatically.
One practical implication: if you are sitting just below the higher-rate threshold on salary and you receive a large interest payment, the interest stacks on top and can push your last £1,000 or so into higher rate, reducing your PSA from £1,000 to £500. The interest itself stays taxed at the 0% PSA portion (now smaller) and the 20% portion (above PSA) — but the side effect of becoming a higher-rate taxpayer for the year may also affect Child Benefit (HICBC), Marriage Allowance and dividend taxation. Plan large interest payments around year-ends or use ISAs to avoid the band crossover.
The ISA Wrapper
Individual Savings Accounts (ISAs) are the UK's flagship retail tax shelter. Interest, dividends and capital gains earned inside an ISA are entirely tax-free both during accumulation and on withdrawal. ISA balances do not have to be reported on a tax return and do not count against the PSA, SRS or any other allowance.
The 2025/26 annual ISA contribution allowance is £20,000 per adult, which can be split across Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA (capped at £4,000 within the £20k total). The allowance is per person, so a couple has £40,000/year combined ISA capacity. Unused allowance does not roll over to the next tax year — use it by 5 April or lose it. Junior ISAs (JISA) for under-18s have a separate £9,000/year allowance which does not count against the adult ISA limit.
The strategic logic for higher-rate savers: with PSA only £500, a Cash ISA paying 4.5% earning £900 of interest saves £160 in tax per year (£400 above PSA × 40%) on a £20,000 holding. Over 10 years of compounded contributions and tax savings, the ISA pulls materially ahead of an equivalent taxable account. For basic-rate savers with £1,000 PSA the breakeven shifts higher (around £22,000 of taxable savings before any ISA advantage), but the strategic case for sheltering remains strong as rates stay around 4-5%. Always use the ISA allowance before piling new money into taxable accounts.
Children's Savings and the £100 Rule
Children have the same Personal Allowance, PSA and SRS as adults. A child with no earned income can therefore receive up to £18,570 of interest tax-free in any year. In practice this is rarely a binding constraint — children rarely hold the £400,000+ of taxable savings needed to generate that level of interest at 4.5%.
The trap: under ITTOIA 2005 section 629 (commonly called the “£100 rule”), interest earned on money gifted by a parent to their child is treated as the parent's income for tax purposes if the interest exceeds £100 per year per parent. So a parent gifting £5,000 to a child savings account earning 4% = £200 of interest, of which all £200 is attributed back to the parent (the £100 is per child, per parent — exceed £100 and the entire amount is parental income, not just the excess). For higher-rate parent taxpayers this can produce unexpected bills.
The £100 rule applies only to gifts from parents. Gifts from grandparents, aunts, uncles, godparents and other relatives are exempt — interest on those funds remains the child's. The rule also does not apply inside a Junior ISA (JISA), which accepts contributions from anyone up to the £9,000 annual JISA allowance with all interest tax-free regardless of donor. For parents wanting to save for a child, the JISA is the obvious vehicle. For grandparents, either a JISA contribution or a direct cash gift to a child account both work without the £100 attribution risk.
How HMRC Collects the Tax
Since April 2016 banks no longer deduct tax at source on interest. Instead they pay interest gross and report each customer's annual interest to HMRC. The HMRC process for collecting any tax owed is automatic and falls into two paths depending on whether you file Self Assessment.
If you do not file SA: HMRC reconciles automatically via the P800 statement, typically issued in October-November after the tax year ends. The P800 shows your total income, allowances applied (PSA, SRS), tax owed and tax already paid via PAYE. If you owe more, HMRC collects it by adjusting next year's tax code (lowering it so a little more PAYE comes out each pay packet). If you are owed a refund, HMRC issues a cheque or pays into your bank account (if you have provided bank details in your Personal Tax Account).
If you do file SA: include all interest from all sources (UK and foreign) on the SA100 / online return. The threshold for compulsory SA on savings income alone is £10,000 untaxed interest, but many filers are already in SA for other reasons (self employment, rental, dividends, capital gains). The SA system calculates the exact tax owed using the order-of-income rule and produces a single bill or refund. Foreign bank interest must also be declared on the foreign pages, with double tax relief available where the foreign country has withheld tax under a treaty. HMRC's automatic exchange of information now flows through 100+ jurisdictions, so undeclared foreign interest is rapidly identified.
Worked Examples
Two illustrations for 2025/26 (England rates):
| Element | Basic-rate (£35k salary) | Higher-rate (£55k salary) |
|---|---|---|
| Salary | £35,000 | £55,000 |
| Savings interest (gross) | £2,000 | £2,000 |
| PA used (against salary) | £12,570 | £12,570 |
| SRS available | £0 (tapered fully) | £0 (tapered fully) |
| PSA available | £1,000 | £500 |
| Tax-free interest | £1,000 | £500 |
| Taxable interest | £1,000 × 20% | £1,500 × 40% |
| Tax on interest | £200 | £600 |
| Collection method | Next year code adjustment | Next year code adjustment |
The basic-rate saver pays £200 of tax on £2,000 of interest (effective rate 10%); the higher-rate saver pays £600 (effective rate 30%). The difference is largely driven by the smaller higher-rate PSA (£500 vs £1,000) and the higher marginal rate. Both savers could shelter the same £2,000 of interest entirely tax-free by placing the underlying capital (around £44,000-£50,000 at 4-4.5%) inside a Cash ISA, saving £200/£600 per year of tax indefinitely.