⚡ Quick Answer
The Personal Savings Allowance (PSA) lets UK savers earn savings interest tax-free up to a limit each year: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers. Banks report your interest to HMRC automatically. At current rates around 4.5% AER, the basic-rate PSA is exhausted with roughly £22,000 in savings. The solution for savers above this threshold: use a Cash ISA, where all interest is permanently tax-free and doesn’t count toward the PSA.
Introduced in April 2016, the Personal Savings Allowance changed how savings interest is taxed for most UK adults. Before that, banks deducted 20% tax at source. Now, interest is paid gross and most savers owe nothing on it — but with rates at current levels, a growing number are exceeding their allowance without realising it.
The Three Allowance Levels
Your PSA depends on your income tax band:
- Basic-rate taxpayers (income £12,570-£50,270 in 2026/27): £1,000 of savings interest per year is tax-free
- Higher-rate taxpayers (income £50,271-£125,140): £500 of savings interest per year is tax-free
- Additional-rate taxpayers (income above £125,140): no allowance — all savings interest is taxable
These thresholds haven’t changed since 2016. With rates much higher than during the low-rate era, many more people now find their interest exceeding the PSA.
When Does the Personal Savings Allowance (PSA) Run Out?
At a 4.5% AER savings rate:
- Basic-rate taxpayer (£1,000 PSA): PSA exhausted with approximately £22,000 in savings
- Higher-rate taxpayer (£500 PSA): PSA exhausted with approximately £11,000 in savings
- Additional-rate taxpayer: all savings interest is taxable from the first pound
These are approximate — your exact position depends on the specific rate you’re earning and when interest is paid. But they give a clear planning threshold.
What Counts Toward the PSA and What Doesn’t
Counts toward PSA:
- Interest from bank and building society savings accounts
- Interest from NS&I bonds and savings products
- Interest from peer-to-peer lending outside an ISA
Does NOT count toward PSA:
- Interest from any ISA (Cash ISA, Stocks and Shares ISA, Innovative Finance ISA)
- Premium Bond prizes
- Dividends from shares (these have a separate Dividend Allowance)
This is the key point: an ISA is completely separate from the PSA. No matter how much interest you earn inside a Cash ISA, it never reduces your PSA. The two are entirely independent.
How HMRC Collects Tax Above the Personal Savings Allowance (PSA)
Banks and building societies report the interest they pay to HMRC electronically each year. If your total savings interest exceeds your PSA, HMRC typically adjusts your PAYE tax code — you’ll pay slightly less take-home pay each month in the following tax year to cover the tax owed. If you complete a Self Assessment return, you declare savings interest there instead.
Most people don’t need to contact HMRC or do anything to claim the PSA — it applies automatically. What’s worth doing is checking periodically that your total savings interest won’t significantly exceed your allowance, and planning accordingly with an ISA if it will.
The Starter Rate for Savings
Alongside the PSA, there’s a separate 0% “Starter Rate” on up to £5,000 of savings interest available to people with very low non-savings income. If your total employment, self-employment, or pension income is below approximately £17,570, you may qualify for some or all of this additional rate, meaning up to £6,000 of savings interest could be tax-free (PSA + Starter Rate). This is particularly relevant for part-time workers, students, and some retirees.
For how the PSA interacts with Cash ISAs and which is the right choice for your situation, see our guide on Cash ISAs and whether they’re worth having.
Frequently Asked Questions
Do I need to claim the PSA?
No — it applies automatically. If you’re within your allowance, you receive all savings interest gross and owe no tax. If you exceed it, HMRC adjusts your tax code or Self Assessment bill.
Does joint account interest count toward both partners’ PSAs?
Interest on joint accounts is split equally between account holders by default. Each person’s half is counted against their own PSA individually.
What tax rate applies to interest above the PSA?
Savings interest above the PSA is taxed at your marginal income tax rate: 20% for basic-rate taxpayers, 40% for higher-rate, and 45% for additional-rate.
Official HMRC guidance on the PSA is at gov.uk/apply-tax-free-interest-on-savings.
