Tax on Savings Interest UK 2025-26: PSA, Starting Rate & ISA

With savings rates at their highest in over a decade, more people than ever are exceeding their tax-free savings allowance. Here is exactly how the rules work — and how to structure your savings to minimise the bill.

The Personal Savings Allowance (PSA)

The Personal Savings Allowance was introduced in April 2016 and gives most savers a tax-free band for savings interest — separate from their income tax Personal Allowance. The PSA depends on your income tax rate:

  • Basic-rate taxpayers (income up to £50,270): £1,000 of interest tax-free per year
  • Higher-rate taxpayers (income £50,271–£125,140): £500 of interest tax-free per year
  • Additional-rate taxpayers (income above £125,140): £0 — no PSA at all

These limits have not changed since 2016, while savings rates have more than tripled since 2022. A basic-rate saver with £20,000 in savings earning 5% generates £1,000 of interest — exactly hitting the PSA limit. With £25,000 saved at 5%, they earn £1,250 and face a tax bill on the £250 excess.

What Tax Rate Applies Above the PSA?

Interest above the PSA is taxed at your marginal income tax rate:

  • Basic-rate taxpayer: 20% on excess interest
  • Higher-rate taxpayer: 40% on excess interest
  • Additional-rate taxpayer: 45% on all savings interest

Important: National Insurance does not apply to savings interest. Only income tax is charged.

Worked Examples

Example 1: Basic-Rate Taxpayer, £50,000 in Savings at 5%

  • Annual interest: £50,000 × 5% = £2,500
  • PSA: £1,000 tax-free
  • Taxable interest: £2,500 − £1,000 = £1,500
  • Tax at 20%: £1,500 × 20% = £300
  • Net interest after tax: £2,200

Example 2: Higher-Rate Taxpayer, £30,000 in Savings at 5%

  • Annual interest: £30,000 × 5% = £1,500
  • PSA: £500 tax-free
  • Taxable interest: £1,500 − £500 = £1,000
  • Tax at 40%: £1,000 × 40% = £400
  • Net interest after tax: £1,100

Example 3: Additional-Rate Taxpayer, £100,000 in Savings at 4.5%

  • Annual interest: £100,000 × 4.5% = £4,500
  • PSA: £0
  • Tax at 45%: £4,500 × 45% = £2,025
  • Net interest after tax: £2,475

The Starting Rate for Savings: A Hidden Allowance

There is a second, less-known allowance: the Starting Rate for Savings. This allows up to £5,000 of savings interest to be taxed at 0% — but only if your non-savings income (salary, pension, self-employment profit) is below £17,570.

The starting rate band reduces by £1 for every £1 of non-savings income above the Personal Allowance (£12,570). At exactly £12,570 non-savings income, the full £5,000 starting rate band is available. At £17,570 non-savings income, it disappears entirely.

This allowance is primarily relevant to pensioners, students, and low earners with savings. A retired person receiving only the State Pension (£11,502 in 2025-26) has a non-savings income well below £12,570, meaning their full starting rate band is available — they could earn up to £5,000 + £1,000 PSA = £6,000 in interest with zero tax.

ISA Savings: Completely Tax-Free

Interest earned inside an Individual Savings Account (ISA) is 100% free from income tax — no PSA limit applies and it does not count toward your taxable income at all. The annual ISA contribution limit for 2025-26 is £20,000, split across Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISA as you choose.

For higher and additional-rate taxpayers, building savings inside an ISA is particularly valuable. A higher-rate taxpayer with £100,000 in a savings account earning 4.5% pays £40% on interest above £500 — approximately £1,760 per year in extra tax. If that same sum were inside ISAs, the tax bill would be zero. The cumulative advantage over many years is substantial.

How HMRC Collects Tax on Savings Interest

Since 2016, banks pay interest gross (without deducting tax). HMRC receives data about your interest from banks and building societies automatically through the tax system. If you owe tax on savings interest, HMRC's default collection method is:

  • PAYE workers: HMRC adjusts your tax code for the following tax year, collecting the tax through your payroll in smaller instalments
  • Self-employed or higher earners filing Self Assessment: declare and pay via your annual tax return
  • Interest above £10,000: you must register for Self Assessment regardless of employment status

Savings Interest vs ISA vs Pension: Optimising Your Tax Position

If you are a basic-rate taxpayer with modest savings, keeping money in a standard savings account up to the £1,000 PSA threshold costs nothing. Beyond that, a Cash ISA offers tax-free growth. If you are a higher-rate taxpayer, prioritise ISA capacity (£20,000 annually) and pension contributions before keeping large sums in taxable savings accounts. The effective rate of return difference at 4.5% interest can be 40% — making the ISA choice material on any sum above £15,000 or so.

Frequently Asked Questions

How much savings interest can I earn tax-free in 2025-26?

Basic-rate taxpayers can earn £1,000 in savings interest tax-free. Higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers have no allowance. Interest inside an ISA is always tax-free regardless of amount.

Does the bank deduct tax on my savings interest automatically?

No. Since 2016, banks pay interest gross. Your bank reports your interest to HMRC, which collects any tax due by adjusting your PAYE code or through Self Assessment.

Is savings interest inside an ISA taxable?

No — all ISA interest is completely free from income tax, regardless of amount. The annual ISA allowance is £20,000 in 2025-26, but existing ISA balances can be unlimited and continue to earn tax-free interest.

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