Personal Savings Allowance: How Much Interest Is Tax-Free

Savings interest is taxable income in the UK. Most people never pay tax on it, but that is because of an allowance rather than because the income is exempt — and the distinction matters the moment your interest rises above a threshold.

The Personal Savings Allowance (PSA) sets how much savings interest you can receive each tax year before Income Tax is due. It is not a fixed figure for everyone: it depends on which Income Tax band you fall into, and it can disappear entirely.

Basic rate taxpayers can receive £1,000 of savings interest tax-free each year, higher rate taxpayers £500, and additional rate taxpayers nothing. The allowance is applied automatically by HMRC — there is nothing to claim.

Interest earned inside an ISA does not count towards it at all. A separate Starting Rate for Savings can give up to £5,000 more at 0% to people whose non-savings income is below £17,570.

The allowance is tied to your Income Tax band:

A basic rate taxpayer can therefore receive £1,000 of savings interest in a tax year with no tax due. A higher rate taxpayer gets half that. An additional rate taxpayer gets no allowance at all, and pays tax on the first pound of interest.

The tax year runs from 6 April to 5 April, and the allowance does not carry forward. Unused allowance is simply lost at the end of the year.

The PSA covers interest from a wider range of sources than most people expect:

• Bank and building society savings accounts
• Interest paid on current accounts
• Fixed-rate bonds and notice accounts
• Credit union accounts
• Corporate and government bonds
• Some purchased life annuity payments

It does not cover interest earned inside an ISA. ISA interest is tax-free in its own right and never counts towards the PSA — which is the whole point of the wrapper. If you hold £30,000 in a Cash ISA and £5,000 in an ordinary savings account, only the interest from the ordinary account is measured against your allowance.

Dividends are separate again, with their own allowance and their own rates.

There is a second, less well-known allowance that sits underneath the PSA and can be far more generous.

The Starting Rate for Savings gives up to £5,000 of savings interest taxed at 0% to people whose other income is low. It works on a taper: every £1 of non-savings income above the Personal Allowance of £12,570 reduces the £5,000 starting rate band by £1.

That means:

• If your non-savings income is £12,570 or less, the full £5,000 starting rate band is available
• If your non-savings income reaches £17,570 or more, the starting rate for savings does not apply at all
• Between those figures, you get part of it

The starting rate stacks with the PSA. Someone with no other income at all could receive £5,000 of starting rate band plus £1,000 of PSA on top, and pay no tax on savings interest well beyond the level most people assume.

This matters most for people who are retired before drawing a state pension, taking a career break, working part-time, or living primarily off savings.

Banks and building societies pay interest gross, with no tax deducted at source. They report the interest they have paid to HMRC automatically after the end of the tax year.

HMRC then does one of two things depending on how you pay tax:

If you pay through PAYE, typically as an employee or pensioner, HMRC uses the reported interest to adjust your tax code. Any tax owed on savings interest is collected through your salary or pension over the following year, which is why a tax code can change without you having done anything.

If you complete Self Assessment, you report the interest on your return and it is taxed alongside your other income.

Because collection lags the interest being paid, a large interest payment can produce a tax code change a year later, when the money is long since spent. Our guide on what to do when savings interest pushes you into higher-rate tax covers that situation in detail.

The PSA has a cliff edge built into it. Because the allowance is set by your tax band, crossing from basic rate into higher rate cuts it from £1,000 to £500 at the same moment your marginal rate on that income rises.

The effect compounds: interest itself counts as income for the purposes of working out which band you are in. A large fixed-rate bond maturing in a single tax year can push total income above the £50,270 higher rate threshold, which simultaneously reduces the allowance and increases the rate applied to the excess.

This is one of the strongest arguments for using an ISA even when the headline rate looks lower. Interest inside the wrapper cannot push you across a band, because it is not counted at all.

Once tax enters the picture, headline rates stop being directly comparable. A taxable account paying a higher gross rate can deliver less than an ISA paying a lower one, depending on your band and how much allowance you have left.

The first step is understanding what the advertised rate actually represents — see AER vs gross rate — and the second is applying your own marginal rate to whatever falls outside the allowance. Only then are two accounts genuinely comparable.

If you have not yet used your ISA allowance, remember that unused ISA allowance cannot be carried forward into the next tax year.

Looking for more on this topic? Browse all our savings guides.

This guide is based on UK primary legislation, regulator handbooks, and official guidance. The following sources cover the rules described above:

• Income Tax (Trading and Other Income) Act 2005
• HM Revenue & Customs
• Individual Savings Account Regulations 1998
• FCA Handbook — BCOBS (Banking: Conduct of Business)

Free, impartial money guidance is available from MoneyHelper, the government-backed service run by the Money and Pensions Service.

Related: Savings Interest Pushed You Into Higher-Rate Tax? | AER vs Gross Rate Explained | All savings guides.