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Until 2016, tax on savings interest was deducted by banks before the money hit your account. The Personal Savings Allowance (PSA) changed this — most people can now receive a significant amount of interest without paying any tax on it at all.
With savings rates having risen sharply since 2022, more people are now exceeding the allowance than before. Understanding how it works — and how to avoid unnecessary tax on savings interest — is worth a few minutes.
What Is the Personal Savings Allowance?
The PSA is the amount of savings interest you can earn each tax year before you start paying tax on it:
| Tax band | Personal Savings Allowance |
|---|---|
| Basic-rate taxpayer (income up to £50,270) | £1,000 |
| Higher-rate taxpayer (income £50,271–£125,140) | £500 |
| Additional-rate taxpayer (income over £125,140) | £0 |
Interest above these limits is taxed at your marginal rate — 20%, 40%, or 45%.
The PSA applies to most interest from UK bank and building society accounts, including easy access savings, fixed-rate bonds, and current accounts that pay interest. It does not apply to interest within ISAs (which is always tax-free) or cash held within a pension.
How Tax Is Collected on Savings Interest
Since 2016, banks no longer automatically deduct tax on interest. If you exceed your PSA, you’re responsible for reporting and paying the tax:
If you’re employed: HMRC usually adjusts your PAYE tax code to collect the tax from your salary. You may receive a letter from HMRC explaining this.
If you’re self-employed or have other taxable income: You report savings interest on your self-assessment tax return.
If you’re a non-taxpayer: (Income below the personal allowance of £12,570) — you can register to receive savings interest gross (without tax) using form R85, or reclaim tax paid using form R40.
The Starting Rate for Savings
There’s an additional layer that many people miss: the starting rate for savings, which allows low-income individuals to earn up to £5,000 of savings interest at 0% tax.
This rate is reduced by £1 for every £1 of non-savings income above the personal allowance (£12,570). If you have non-savings income (salary, pension) of £17,570 or more, the starting rate is fully used up and the PSA applies in the normal way.
For people with very low non-savings income (retirees on small pensions, for example), this allowance can be significant — potentially meaning £6,000+ of tax-free interest between the starting rate and the PSA combined.
When Might You Exceed the PSA?
With higher savings rates (5%+ on easy access and fixed-rate accounts in 2024), the PSA goes further. Examples:
- A basic-rate taxpayer with £20,000 in savings at 5% earns £1,000 interest — exactly hitting the £1,000 allowance
- A higher-rate taxpayer with £10,000 at 5% earns £500 — hitting the £500 limit
- A higher-rate taxpayer with £40,000 in savings at 5% earns £2,000 interest — exceeding the allowance by £1,500, resulting in £600 additional tax
If you’re a higher-rate earner with significant savings outside an ISA, using ISA allowances becomes more important.
How to Minimise Tax on Savings Interest
Use your ISA allowance: Interest inside a Cash ISA or Stocks and Shares ISA is always tax-free, regardless of amount. If you’re close to or exceeding your PSA, shifting savings into an ISA is the most straightforward solution. The annual ISA allowance is £20,000 (2024/25).
Shift savings to a lower-earning partner: If one partner has a lower PSA or no savings at all relative to the other, holding savings in their name uses their allowance before triggering tax for the higher earner.
Use your PSA for the highest-rate savings: Keep the highest-interest savings outside your ISA (to use the PSA), and lower-rate savings inside (where the tax shelter may be less necessary). This ordering maximises the benefit of both wrappers.
Summary
The personal savings allowance means most people pay no tax on savings interest — but with higher rates, more savers are now approaching or exceeding their limit:
- Basic-rate taxpayers can earn £1,000 of interest tax-free; higher-rate £500; additional-rate nothing
- You don’t need to do anything if you’re within the allowance — banks no longer withhold tax automatically
- If you exceed it, HMRC usually adjusts your tax code — but self-employed people need to report it on self-assessment
- ISA savings are always tax-free — if you’re regularly exceeding the PSA, maximise ISA contributions first
- Low-income individuals may also benefit from the starting rate for savings — up to £5,000 of interest at 0% in addition to the PSA
Next read: How to protect your savings from inflation UK | https://moneyunpacked.co.uk/how-to-protect-your-savings-from-inflation-uk/