With savings rates in the UK at their highest in over a decade, more people are earning enough interest on their savings to have a tax liability. The system is more nuanced than many realise: there are multiple layers of allowances that can stack to allow you to earn significant amounts of interest completely tax-free. Understanding them can save you hundreds of pounds.
The Personal Savings Allowance (PSA)
The Personal Savings Allowance allows you to earn a certain amount of savings interest tax-free each year, outside of an ISA. Basic rate taxpayers (income £12,571–£50,270) get £1,000 of interest tax-free. Higher rate taxpayers (income £50,271–£125,140) get £500. Additional rate taxpayers (income over £125,140) get no PSA. At current interest rates of around 4.5–5%, the PSA means: basic rate taxpayers can hold around £20,000–£22,000 in savings outside an ISA without paying tax. Higher rate taxpayers: around £10,000.
- Basic rate taxpayer: £1,000 interest tax-free per year
- Higher rate taxpayer: £500 interest tax-free per year
- Additional rate taxpayer: no PSA (all savings interest taxed)
- At 5% interest: basic rate taxpayer can hold ~£20,000 before tax
- PSA applies to savings outside ISAs
The Starting Rate for Savings
The starting rate for savings is a lesser-known allowance that can provide up to £5,000 of savings interest taxed at 0%. It's available to people with non-savings income (employment, pension, rental income) below £17,570. The starting rate band reduces by £1 for every £1 of non-savings income above the personal allowance. For example: if your non-savings income is exactly £12,570 (the personal allowance), you have the full £5,000 starting rate band available. If your non-savings income is £16,570, you have £1,000 of starting rate available.
- Full starting rate: £5,000 of savings interest taxed at 0%
- Available when non-savings income is under £17,570
- Reduces £1 for every £1 of income above £12,570
- Zero remaining starting rate: when non-savings income exceeds £17,570
- Useful for: low earners, those with no/low employment income
Combining Allowances: Maximum Tax-Free Interest
The power is in stacking these allowances. A low-income individual could potentially earn: £12,570 non-savings income (personal allowance) + £5,000 savings interest at starting rate (0%) + £1,000 PSA (basic rate, 0%) = £18,570 non-savings income before paying any income tax, AND receive up to £6,000 of savings interest completely tax-free. On top of this, any interest within an ISA is additional and always tax-free regardless of income.
- Low earner: Personal allowance + starting rate + PSA = £6,000 interest tax-free
- Basic rate taxpayer: PSA = £1,000 interest tax-free (outside ISA)
- Plus: ISA interest is always tax-free, unlimited
- Strategy: fill ISA first, then use PSA capacity for non-ISA savings
- Non-taxpayers: report zero tax on interest via self-assessment or R85 form
How Tax on Savings Is Collected
Banks now report interest directly to HMRC. If you owe tax on savings interest, HMRC adjusts your tax code in PAYE or sends a tax return. You don't need to do anything proactive for basic amounts. However, if you complete a self-assessment, declare all savings interest. Interest within an ISA is never declared. If you believe you've overpaid tax on savings interest, you can reclaim using form R40.
- Banks report interest to HMRC automatically
- HMRC adjusts tax code if you owe tax on interest
- Self-assessment: declare all non-ISA savings interest
- ISA interest: never reported, always tax-free
- Reclaim overpaid tax: form R40 (non-self-assessment taxpayers)
Do I need to tell HMRC about my savings interest?
If your savings interest plus other income exceeds your allowances, HMRC should adjust your tax code automatically. If you do self-assessment, include savings interest on your return. Contact HMRC if you're unsure.
Is Premium Bond income taxable?
No. Premium Bond prizes are completely tax-free and don't count towards your PSA. They're a separate category altogether.
Do joint savings accounts split interest between partners?
Yes. Interest on joint accounts is normally split 50/50 between partners and each person uses their own PSA. This means a couple with a joint account gets £1,500 combined PSA.
- savings interest
- personal savings allowance
- tax free savings
- uk tax 2026