Personal Savings Allowance Complete Guide UK 2026/27

What the Personal Savings Allowance is

The Personal Savings Allowance (PSA) is a UK tax break that lets most people earn some savings interest each year without paying tax on it. Introduced in April 2016, it removed the need for most savers to do anything about tax on their savings — the bank pays interest gross and HMRC handles the calculation behind the scenes.

The size of your allowance depends on your income tax band.

The three tiers (2026/27)

• Basic-rate taxpayer (income £12,571 to £50,270): £1,000 of savings interest tax-free per year.
• Higher-rate taxpayer (income £50,271 to £125,140): £500 tax-free.
• Additional-rate taxpayer (income above £125,140): £0 — every penny of taxable savings interest is taxed at 45%.

The allowance is per person, not per household. Couples each get their own. A couple where one earns £45,000 and the other £20,000 has £2,000 of combined PSA — £1,000 each, completely separate from each other's accounts.

The starter rate for savings

Sitting alongside the PSA is a separate £5,000 starter rate band that taxes savings interest at 0% — but only if your earned income is low. The starter rate tapers: every £1 of non-savings income above the £12,570 personal allowance reduces your starter rate by £1. By the time your earned income reaches £17,570, the starter rate is fully gone.

This makes the starter rate genuinely useful for early retirees living mostly off pensions or investments, part-time workers, and people taking a year out. For full-time salaried workers, it doesn't apply — your earned income exceeds the taper threshold.

Use the Personal Savings Allowance Calculator to see exactly where you sit including the starter rate calculation.

What counts as savings interest

The PSA covers:

• Easy-access and notice savings accounts
• Fixed-rate bonds
• Current account interest (most reward current accounts)
• Regular saver accounts
• NS&I taxable products (e.g., Direct Saver, Income Bonds)
• Gilt and corporate bond coupons held outside an ISA

It does not cover:

• ISA interest — outside the tax system entirely
• Premium Bond prizes — tax-free regardless of band
• Dividends — use the separate dividend allowance (£500 in 2026/27) instead

How HMRC actually collects tax above the PSA

Banks and building societies pay interest gross (no tax deducted at source). At the end of the tax year, HMRC receives interest data direct from financial institutions and reconciles against your reported income.

If you've exceeded your PSA, HMRC typically collects the tax by adjusting your tax code the following year — your monthly take-home falls slightly, and you don't get a bill. Self-assessment taxpayers report the interest on their return and pay through that route instead.

The first many UK savers know they've crossed the PSA is the tax code change. Worth checking your tax code annually if your savings interest is approaching the limit.

Common misconceptions

• "ISA interest counts toward the PSA." It doesn't. ISA interest is outside the tax system. The PSA is separate.
• "Joint accounts use one person's PSA." No — HMRC defaults to splitting interest 50/50. Each person uses their own PSA on their half.
• "I'll owe tax instantly if I cross the PSA." No — HMRC adjusts your tax code in the following tax year. You're never asked to pay immediately.
• "Premium Bond prizes count toward the PSA." They don't — Premium Bond prizes are tax-free for all bands.
• "Higher-rate taxpayers lose the PSA entirely." No — higher-rate keeps £500. Only additional-rate (above £125,140) gets £0.

When a Cash ISA becomes beneficial

The PSA-vs-Cash-ISA decision comes down to one calculation: is your taxable savings interest approaching your PSA?

Basic-rate, interest under £700/year: savings accounts often beat Cash ISAs on rate — the PSA covers you and the wrapper isn't earning its keep.

Basic-rate, interest £700–£1,500/year: approaching or crossing the PSA. Cash ISA starts winning, especially if savings are growing.

Higher-rate, any interest above ~£250/year: Cash ISA usually wins. The £500 PSA is small enough that even modest interest threatens it.

Additional-rate, any savings: Cash ISA always wins. No PSA means immediate 45% tax on everything outside the wrapper.

A worked example: basic-rate saver with £25,000 at 4.5% earns £1,125 — £125 above the PSA, taxed at 20% = £25/year. A Cash ISA at 4.4% would give £1,100 tax-free. The ISA wins by £25 plus the future-proofing as the balance grows. See Best Cash ISAs UK 2026/27.

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Frequently asked questions

Do I need to declare savings interest below my PSA?

No, not if you're employed and HMRC has the data via your bank. If you complete self-assessment for other reasons, you declare gross interest there but pay no tax up to your PSA.

Does the PSA include current account rewards?

It includes interest paid by current accounts (reward current accounts often pay 2–5% on balances up to a cap). It doesn't include cashback rewards or switching incentives — those count as 'miscellaneous income' under different rules.

What if I move from basic to higher rate mid-year?

HMRC uses your final tax band at year end. If you spent the year transitioning, the higher-rate £500 PSA applies to the whole year's interest retrospectively.

Can I gift money to my spouse to use their PSA?

Yes. Spousal transfers between UK residents have no inheritance tax or capital gains tax consequences. Moving savings to a basic-rate-taxpaying spouse to use their £1,000 PSA is a legitimate tax-planning move.

How is interest taxed if I exceed the PSA?

At your marginal rate on the excess. Basic-rate: 20%. Higher-rate: 40%. Additional-rate: 45%. HMRC collects via tax code adjustment for PAYE earners, or via self-assessment for those who complete returns.