Shutterstock / Andrii Yalanskyi
This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
A record number of people are now paying tax on their savings – not because they’ve suddenly become wealthier, but because frozen tax bands are catching them out.
Whether you’ve built up a rainy‑day fund or are managing money in retirement, knowing how the personal savings allowance works could save you hundreds.
What’s on this page?
First introduced in 2016, the personal savings allowance (PSA) is a government allowance that lets you earn a certain amount of interest on your savings each tax year without having to pay income tax on the interest.
Knowing all about the PSA, and how you’ll be taxed if you go over the limit, is a useful tool in planning your savings strategy – helping you to calculate any tax you may need to pay and working out where your money can grow best.
The allowance has been at the same level since it was introduced before 2016, and income tax thresholds that have been frozen since 2021/22 mean that more people get the lower personal savings allowance for higher-rate taxpayers.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says: “Frozen income tax thresholds will drag millions more people into paying tax on savings interest for the first time and push them into higher tax bands as earnings rise. While basic rate taxpayers can earn up to £1,000 in savings interest tax-free, the personal savings allowance halves to £500 for higher rate taxpayers and is zero for additional rate taxpayers. This is why tax efficiency is so crucial.”
Interest paid on savings accounts is taxable in the same way as earnings from employment or pension income, and your allowance is based on your income tax band.
Martin Stanley, chartered financial planner and director at independent financial adviser Rowley Turton, says: “The PSA means you’re allowed to earn £1,000 tax-free, or £500 if your income overall makes you a higher-rate taxpayer. This is on top of any other allowances, and everybody gets it except the very highest earners,” he says.
Laura Suter, director of personal finance at AJ Bell, explains that additional-rate taxpayers don’t get a personal savings allowance. “The personal savings allowance will be cut to zero – meaning you’ll pay a 45% tax rate on all savings income you receive (unless it’s in an ISA or pension).
Because of competitive interest rates, it now takes much less cash to breach the PSA than it did a few years ago. For a basic-rate taxpayer with a savings account paying 4% annual interest, the PSA would be exceeded if they had more than £25,000 saved.
The PSA only applies to savings income, and for most people, this means interest on bank or building society accounts. It can also include building society bonus payments and interest on corporate or government bonds, unit trusts and life annuity payments.
If you have a joint savings account, each account holder is usually assumed to have earned half of the interest paid. You can ask for this to be changed, so that the interest is taxable in line with each member’s contribution. You’ll need to contact HMRC and you may need to prove that one person put more money in than the other.
Yes, the personal savings allowance applies across the whole of the UK. But there is a difference for people in Scotland.
While the Scottish government sets its own income tax bands for earnings and pensions, savings and dividend income are taxed using the UK-wide bands and thresholds.
This means that even though a Scottish taxpayer might pay the Scottish higher rate (42%) on earnings over £43,663, for the purposes of savings interest, they only become a higher-rate taxpayer when their total UK-wide income breaches £50,271. Therefore, a Scottish taxpayer earning £48,000 would still receive the full £1,000 PSA, not the reduced £500 allowance.
.jpg?sc=max&mw=800&h=450&la=en&h=731&w=1300&hash=5EB1CA0E3017972905989D492CC174D6)
Stanley explains: “Lots of people earn more interest than the £1,000 a year (or £500 for higher-rate taxpayers), and that's no problem at all.
“The bank tells HMRC, and HMRC will [usually] deduct the tax from your other income automatically. You don't need to do anything or notify anyone.”
HMRC will generally change your tax code to allow you to pay back what you owe – and uses the interest you received in the previous year to estimate how much you'll need to pay going forwards.
If the tax can’t be taken from other income – for example, if your only other source of income is the state pension – then HMRC will contact you, setting out the tax you owe. This is known as a simple assessment tax bill.
If you normally complete a self-assessment tax return, for example, if you’re self-employed, you’ll need to report interest income in that way. You'll also need to fill out a self-assessment if you make more than £10,000 in savings interest and investments.
You shouldn’t need to calculate the tax you owe, as HMRC will do this automatically, Stanley adds. “But if you want to know, you’ll just pay 20% income tax on anything that goes over the allowance, or 40% if you are in the higher-rate tax bracket.”
From April 2027 the tax on savings interest is increasing by two percentage points, to 22% for basic-rate taxpayers, 42% for higher-rate taxpayers and 47% for additional-rate taxpayers.
As well as the PSA, some people on low incomes – such as those who have retired early or are working part-time – can take advantage of an allowance known as the starting rate for savings.
This is a 0% rate of tax, which can apply for up to £5,000 of savings income. It only applies in full if your annual non-savings and non-dividend income is below £12,570.
If your other income is above £12,570, but below £17.570, your £5,000 allowance is reduced by the amount above £12,570.
As an example, if you have £16,070 of pension income, then the starting rate for savings will cover £1,500 of any interest you receive. You still get the personal savings allowance as well.
A basic-rate taxpayer who has no other income could, in theory, earn up to £18,570 in savings interest a year completely free of tax.
This would involve using up their £12,570 personal allowance, £5,000 starting rate for savings allowance and £1,000 PSA.
If you’re worried about paying tax on your savings, you have options. Alice Haine says: “Making the most of tax wrappers, such as ISAs and pensions, as well as considering cash-adjacent investments such as short-dated gilts, can significantly reduce an individual’s personal tax burden.”
Currently, savers can put £20,000 per tax year into ISAs, and any interest received is tax-free. From April 2027, the cash ISA limit will be cut to £12,000 for those under 65. Under-65s will be able to use the rest of their £20,000 allowance in stocks and shares ISAs. There will be no change for people over 65.
Savers can put up to 100% of their salary (or £60,000 each year, whichever is lower) into a private pension. If you’re still working but have already started flexibly taking money from your pension, you may have a lower maximum of £10,000 (known as the money purchase annual allowance).
Even if you aren’t working – or are on a low income – you can still pay in £2,880 per year, which is topped up to £3,600 automatically once standard tax relief has been applied.
Winnings from investments in Premium Bonds are tax-free and do not count towards your PSA. But it’s worth remembering that most bond holders have never won a prize, so whilst there’s a very small chance that you could win big, you may not be better off than if you’d paid tax on your savings interest.
If you are married or in a civil partnership and your partner is in a lower tax bracket (or hasn't used up their PSA), consider moving a portion of your cash savings into an account in their name to use their tax-free allowances.
Get your money moving with our great rate.
In partnership with NatWest. Interest paid monthly. Available to UK residents 18+ only.
Discover 20 simple, practical steps to ensure you pay less tax on your money.
We reveal 5 key tax allowances you can ‘stack’ to achieve a significant tax-free income.
