The Personal Savings Allowance (PSA) lets most UK taxpayers earn a certain amount of savings interest each year completely tax-free. Introduced in 2016, it was designed to ensure most people would never need an ISA for cash savings — but with savings rates well above the near-zero levels of the 2010s (Bank Rate is 3.75% at the time of writing, October 2026), higher earners and diligent savers are increasingly exceeding their PSA. Understanding the limits, what counts, and how to shelter excess savings interest is essential for tax-efficient saving in 2026.
What Is the Personal Savings Allowance?
The Personal Savings Allowance is the amount of savings interest you can earn each year free from income tax. The limit depends on your income tax band. Basic-rate taxpayers (income up to £50,270) get a £1,000 PSA. Higher-rate taxpayers (income £50,271–£125,140) get a £500 PSA. Additional-rate taxpayers (income over £125,140) get no PSA at all — all their savings interest is taxable. Interest from savings accounts, cash ISAs (actually excluded — ISA interest doesn't use your PSA), bank accounts, peer-to-peer lending, and government securities all count towards your PSA. If you exceed your PSA, HMRC usually collects the tax through a PAYE tax code adjustment — you don't necessarily need to fill in a self-assessment return, but you may receive a tax notice.
- Basic rate (up to £50,270): £1,000 PSA
- Higher rate (£50,271–£125,140): £500 PSA
- Additional rate (£125,140+): no PSA
- ISA interest: does NOT count against your PSA — fully separate
- Tax collection: usually via PAYE code adjustment or self-assessment
Are You Likely to Exceed Your PSA?
To find your own limit, divide your PSA by your interest rate. At 4%, for example: a basic-rate taxpayer exceeds the £1,000 PSA with about £25,000 in non-ISA savings, and a higher-rate taxpayer exceeds the £500 PSA with about £12,500. If your savings exceed these levels in non-ISA accounts, you may now face a tax bill. For many people who accumulated savings through the near-zero interest rate era, this is a new and unexpected issue. The solution is primarily to use your annual ISA allowance (£20,000) to shelter savings from tax. It matters more from 6 April 2027, when tax on savings interest above your allowances rises by 2 percentage points, to 22%, 42% and 47%. Interest earned within an ISA is completely tax-free and does not count against your PSA.
- At 4%: basic-rate taxpayer exceeds PSA on about £25,000 in non-ISA savings
- At 4%: higher-rate taxpayer exceeds PSA on about £12,500 in non-ISA savings
- Solution: move savings into Cash ISA (up to £20,000/year allowance)
- ISA transfer: can move existing savings into ISA without affecting annual allowance
- Cash ISA rates in 2026 are competitive with standard easy-access accounts
Using Your ISA Allowance Strategically
The £20,000 annual ISA allowance (per adult, per tax year) is the primary tool for protecting savings interest. If you have significant cash savings outside an ISA and are exceeding your PSA, the priority is to shift those savings into a Cash ISA. Moving existing non-ISA savings into a Cash ISA counts as a new subscription and uses your allowance; only transfers from one ISA to another don't. For couples, the combined allowance is £40,000/year, making the ISA a powerful household tool. For 2026/27, the tax year ends 5 April 2027, and any unused ISA allowance cannot be carried forward. From 6 April 2027, under-65s can put at most £12,000 a year into Cash ISAs (the overall limit stays £20,000), so 2026/27 is the last year you can shelter the full £20,000 in cash.
- £20,000 annual ISA allowance — use it by 5 April each year
- Couples: £40,000 combined annual allowance
- Unused allowance: lost at end of tax year — cannot carry forward
- Existing savings: transfer to ISA anytime without affecting annual allowance
- ISA rates: increasingly competitive with non-ISA equivalents
Other Ways to Reduce Savings Tax
Beyond ISAs, additional strategies for reducing tax on savings interest include: putting savings in a lower-earning partner's name (they may have unused PSA or lower tax rate); pension contributions — increasing these reduces your adjusted net income, potentially pushing you from higher-rate to basic-rate band (doubling your PSA from £500 to £1,000); Premium Bonds — interest equivalent is in the form of tax-free prizes (no impact on PSA); and NS&I Savings Certificates if available (they've been withdrawn from general sale but existing holders benefit from tax-free interest). Regular saver accounts — while high-rate — accrue interest over the year, so the interest typically hits within one tax year's PSA.
- Transfer to lower-rate spouse/civil partner
- Increase pension contributions to reduce adjusted net income
- Premium Bonds: tax-free prizes, no PSA impact
- NS&I products: where available, some offer tax-free interest
- Regular savers: interest paid annually, useful PSA-year planning
Frequently Asked Questions
Does cash ISA interest count against my PSA?
No — ISA interest is completely separate from the Personal Savings Allowance. It doesn't reduce your PSA.
How does HMRC know how much savings interest I've earned?
Banks and building societies report interest payments to HMRC under their automatic exchange of information obligations. HMRC then adjusts tax codes accordingly.
I didn't receive a tax notice — do I still owe tax?
If your bank has reported your interest to HMRC and it exceeds your PSA, HMRC will typically adjust your PAYE code or issue a Simple Assessment. If you're self-assessed, you include it on your return.
Can children earn savings interest tax-free?
Yes — children have a full Personal Allowance (£12,570 in 2026/27) and a £1,000 PSA (as basic-rate taxpayers with no income). Interest from a Junior ISA is tax-free and separate.
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