What Is the Personal Savings Allowance?

For years, banks automatically deducted tax from savings interest before it reached you. Since 2016 that has changed: most people now earn a slice of interest entirely tax-free, thanks to the Personal Savings Allowance. With savings rates higher than they were for much of the last decade, this allowance has become far more relevant, and it is worth knowing exactly how much you can earn before tax bites. This guide explains what the Personal Savings Allowance is, how much you get, how it varies by income, and how it sits alongside ISAs. This is general information, not financial advice.

What the Personal Savings Allowance is

The Personal Savings Allowance (PSA) is the amount of interest you can earn from savings each tax year without paying any tax on it. Introduced in April 2016, it replaced the old system in which banks deducted basic-rate tax from interest at source.

The key feature of the PSA is that it depends on your income tax band. Unlike a flat allowance that everyone receives equally, the amount you get shrinks as your income rises, and disappears altogether for the highest earners. It applies to interest earned outside tax-free wrappers such as ISAs, which already shelter interest from tax in their own right.

In practical terms, the PSA means that for most savers, modest amounts of interest arrive untaxed, and tax only becomes a concern once interest exceeds the allowance. It works alongside the broader Personal Allowance for income and forms part of how the UK taxes savings.

The Personal Savings Allowance is a tiered tax break: the more you earn, the smaller it gets, until the very highest earners receive none at all.

How much you get

The amount of the PSA is set by your income tax band:

So a basic-rate taxpayer can earn up to 1,000 pounds in savings interest in a tax year without paying tax on it. A higher-rate taxpayer gets half that, 500 pounds. Anyone paying the additional rate of income tax receives no PSA at all, meaning every pound of savings interest outside an ISA is taxable.

Your tax band is determined by your overall taxable income, which is why a pay rise that pushes you into a higher band can also cut your savings allowance. Understanding which band you fall into, set out by the income tax thresholds, tells you which allowance applies. The figures themselves run on the UK tax year, refreshing each 6 April.

The starting rate for savings

There is a further, lesser-known break that helps people on low incomes: the starting rate for savings. This allows up to an additional 5,000 pounds of savings interest to be tax-free, on top of the PSA, but it is aimed squarely at those with little other income.

The catch is that the starting rate tapers away as your non-savings income (such as wages or a pension) rises above the Personal Allowance. For every pound of other income above that threshold, you lose a pound of the 5,000-pound starting rate. As a result, only people with relatively low earnings benefit from it, but for them it can mean a substantial amount of interest earned entirely tax-free. It is well worth checking if you have modest income but meaningful savings.

What the allowance covers

The PSA applies to interest from a wide range of sources, including:

• Bank and building society savings accounts, both easy-access and fixed-rate.
• Interest from current accounts.
• Interest distributions from some funds and corporate bonds.
• Peer-to-peer lending interest.

It does not apply to interest earned inside an ISA, for the simple reason that ISA interest is already tax-free and so does not use up your allowance. This is one reason ISAs remain valuable even with the PSA in place: they protect interest regardless of how much you earn or which tax band you are in. Our comparison of a cash ISA versus a stocks and shares ISA explains the options.

When you compare savings products, remember that rates are quoted as an AER; our explainer on APR versus AER shows how that figure reflects compounding and why it matters for the interest you actually earn.

How tax on excess interest is collected

If your savings interest exceeds your PSA, the surplus is taxable, but for most people the process is automatic and requires no action.

Banks and building societies report the interest they pay you to HMRC. HMRC then works out whether you owe tax and usually collects it by adjusting your tax code, so a little more tax is taken from your wages or pension over the year. If you complete a self assessment tax return, the interest is declared there instead and the tax is settled through that route.

A few practical points follow:

• You do not normally need to declare savings interest separately if you are taxed through PAYE; HMRC handles it.
• It is still wise to keep your own record of interest earned, especially if you have several accounts, so you can check HMRC's figures.
• If your circumstances change, for example you move tax bands, your allowance and any tax due will change too.

Making the most of it

A few simple habits help you use the allowance well:

• Know your band, because it sets your allowance at 1,000 pounds, 500 pounds or nil.
• Use ISAs for interest above your PSA, since ISA interest is tax-free regardless of band.
• Check the starting rate if you have a low income but significant savings.
• Spread savings sensibly between taxed accounts and ISAs to keep more of your interest.
• Review each tax year, as rates, balances and your income can all shift the picture.

For free, impartial guidance, MoneyHelper and the official gov.uk pages explain how savings interest is taxed and how to check your position.

The bottom line

The Personal Savings Allowance lets most people earn savings interest tax-free each year: 1,000 pounds for basic-rate taxpayers, 500 pounds for higher-rate taxpayers, and nothing for additional-rate taxpayers. It covers interest from ordinary savings accounts but not from ISAs, which are already tax-free, and HMRC usually collects any tax on interest above the allowance automatically. Know your tax band, use ISAs for interest beyond your allowance, and check the starting rate if your income is low, and you can keep more of what your savings earn.