When you’re putting money away into a savings account and earning a little bit of interest, you may wonder how much of that interest you might need to pay tax on. The good news is most people can earn some interest without paying any tax at all – thanks to the Personal Savings Allowance (PSA).
In a nutshell, the PSA lets most people earn a certain amount of interest on their savings without paying tax on it. How much you can earn tax-free depends on the rate of income tax you pay.
Let’s break it down.
Personal Savings Allowance and tax bands
Even if you're not earning a huge amount of interest right now, it's worth understanding how the allowance works - especially if rates rise or your savings grow over time. Tax rules can feel a bit hidden away, but knowing the basics could help you feel more confident about where your money sits and how that's working for you.
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Basic rate taxpayers
If you pay the basic rate of income tax - which is 20% - you can earn up to £1,000 a year in savings interest before any tax is due. This usually applies to people with a total income between £12,571 and £50,270, which is the current threshold for the 2025/26 tax year. The savings interest could be from savings accounts, fixed rate savings accounts and even interest earned on current accounts. This tax-free allowance means many savers won't pay tax on the interest at all.
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Higher rate taxpayers
If you fall into the higher rate tax band - which is 40% - your PSA is £500 a year. This usually applies to people with a total income between the basic rate limit and the additional rate threshold, set at £125,140, which is the current threshold for the 2025/26 tax year. Just like basic rate taxpayers, it means you can earn interest up to this amount before you’ll be liable to pay taxes. Because higher rate taxpayers may have more savings or earn more interest, they might be more likely to go over this allowance - but we can give you some more details on this shortly.
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Additional rate taxpayers
If you're an additional rate taxpayer - that's 45% - unfortunately you don't get a personal savings allowance. This usually applies to people with a total income above £125,140, which is the current threshold for the 2025/26 tax year. That means all of your savings interest could be taxable. It's worth bearing this in mind if your total income puts you into this band.
What about the starting rate for savings accounts?
If your income is less than £17,570 you may also qualify for something called the starting rate for savings. The starting rate is generally aimed to help those who are retired or only working part-time and it allows you to earn up to £5,000 in savings interest tax free.
Although not the same as the PSA and not everyone qualifies for it, if you do, it can make a big difference.
How does the Personal Savings Allowance work?
PSA is applied automatically, so if your interest is under the limit you don’t need to do anything. No forms and no phone calls.
It was introduced back in 2016 to make saving simpler. It’s a way for most people to earn interest without automatically being taxed on it. Banks and building societies, like Hodge, share their interest data with HMRC – so you won’t have to do anything to claim it.
How does the ISA allowance work with the Personal Allowance?
This is a common question for savers. If you have an ISA, will it use up your personal savings allowance? The short answer? No, it won’t.
Interest from an Individual Savings Account, also known as an ISA, is already tax-free up to a limit of £20,000 for the tax year 2025/26 and it’s completely outside of your PSA. So, if you’ve got money in an ISA and you’re earning interest on it, that doesn’t count towards your PSA.
This means you can earn tax-free interest in your ISA and still use your PSA on interest earned from other savings accounts.
Some people use a mix of ISAs and non-ISA savings to make the most of their tax-free interest. It could be worth exploring if you’re trying to grow your savings without tipping over the allowance – you can find out more in these blogs:
The Personal Savings Allowance FAQs
Here are some commonly asked question around the PSA in the UK
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Do I need to apply for a PSA?
There is no need to apply as the HMRC will track how much interest you've earned using the information from your bank or building society - so, if you're under the PSA you're all sorted.
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How does HMRC know my interest?
Most banks and building societies will report to HMRC what you’ve earned in interest as part of their digital tax reporting. So, the chances are you shouldn't need to do anything, but it's worth checking with your chosen bank.
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What types of interest are covered?
The PSA applies to interest from most types of savings, like: Easy Access savings accounts, Fixed Rate Bonds, Interest on some current accounts
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Has the PSA changed recently?
The PSA has stayed the same since it was introduced in 2016, but it’s always worth checking what PSA applies to you before opening an account.
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Do ISAs use up my PSA?
No – ISAs are tax-free on their own and don't count towards your PSA.
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What if I exceed my PSA?
Any interest you earn over your personal savings allowance must be declared for tax purposes.
What’s next? How to make the most of tax-free interest
Everyone’s financial circumstances will be different. Some people will find it easier to spread their savings across ISAs and non-ISA accounts to make the most of their tax-free allowance, whereas for others, the PSA is perfect to keep them earning tax-free interest.
There are also some other nuances to making the most of your tax-free savings, for example saving as a couple can mean you both use your tax-free allowance. For more tailored needs and larger sums, planning can get a bit fiddly, so we’d always recommend you speak to an independent financial advisor (IFA) so you can keep up to date with any changes.
Explore our savings options
Whether you’re looking for flexibility or a fixed return, you might want to explore our savings range.
Take a look at our Easy Access savings accounts, Fixed Rate Bonds and Cash ISAs.
If you’d like to learn more, these helpful blogs may be worth a read too.
This article is correct at time of publishing and for general information purposes only. The tax treatment of your savings will depends on your personal circumstances and may change in the future. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at www.unbiased.co.uk