If you have any savings outside an ISA, the Personal Savings Allowance (PSA) is probably the most useful piece of UK tax law you'll come across. It hands most basic-rate taxpayers £1,000 of interest each year completely tax-free. Most people don't realise it exists until their bank pays them more than they expected.
Here's the full picture in one place: who gets what, how the allowance interacts with the savings starter rate and ISA allowance, and what changes once you nudge into a different tax band.
The allowance is per person, not per household. A couple where one earns £45,000 and the other earns £20,000 has £2,000 of combined PSA — £1,000 each, completely separate from each other's accounts.
HMRC pulls interest data direct from your bank or building society at the end of each tax year. They run a calculation that treats your interest as if it were the top slice of your income. If the total falls within your PSA, no tax is owed. If it goes over, the excess is taxed at your marginal rate.
An example. You earn £35,000 a year (firmly basic-rate) and your savings earn £1,250 in interest in 2025/26. The first £1,000 is covered by your PSA. The remaining £250 is taxed at 20% — £50 — usually collected by HMRC adjusting your tax code the following year.
Sitting on top of the PSA is a separate £5,000 starter rate band that taxes savings interest at 0% — but only if your non-savings income is low. The allowance 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 hits £17,570, the starter rate is gone entirely.
This makes the starter rate genuinely useful for early retirees, part-time workers and people taking a year out — and largely irrelevant for full-time salaried workers.
ISA interest doesn't count towards the PSA at all. It's outside the tax system entirely. That makes the choice "ISA vs taxable account" a question of marginal tax, not headline rate.
For a basic-rate taxpayer earning £700 in interest a year, a taxable account at 4.5% beats an ISA at 4.4% — both keep all the interest. For the same person earning £1,500 in interest, the £500 above the allowance is taxed at 20%, so they'd need the taxable account to beat the ISA by enough to absorb that 20% hit on a fifth of their interest. In practice, top easy-access taxable accounts and top easy-access cash ISAs sit within 0.1–0.2% of each other, which means the answer flips depending on exactly where you are.
Government gilts purchased outside an ISA pay coupons that count as savings income (so they sit inside the PSA) but capital gains on gilts held to maturity are completely free of CGT. Corporate bond interest sits inside the PSA. Bond fund distributions that are flagged as "interest distributions" also use the PSA. "Equity income" distributions from funds, by contrast, count as dividend income and use a separate, smaller dividend allowance.
Want to see how your interest stacks up against the allowance? Open the savings calculator.
No. It's applied automatically. Banks and building societies pay interest gross (no tax deducted), and HMRC reconciles the year-end numbers behind the scenes. If you owe tax, they'll usually adjust your tax code the following year rather than send a bill.
Yes. Reward current accounts, regular savers, fixed bonds, easy-access savings, NS&I taxable products and bond/gilt coupons all count. Premium Bonds and ISAs are the exceptions.
HMRC uses your actual position at the end of the tax year. If you spent the year transitioning, the higher-rate £500 PSA applies retrospectively to the whole year's interest, not just the months at higher-rate.
Not necessarily. A basic-rate taxpayer with a small savings pot may never use their full PSA — meaning a Cash ISA at a lower rate is genuinely worse than a taxable account at a higher rate. Run the numbers. The ISA wrapper has more value the bigger your savings pot, the closer you are to the PSA limit, and the higher your marginal tax rate.
This article is general information about UK personal finance. It is not regulated financial advice and Pennywise Finance is not authorised by the Financial Conduct Authority. For decisions involving large sums or complex situations, please consult an FCA-authorised adviser.