Personal Savings Allowance 2026/27: How Much Interest Is Tax-Free

Savings interest is one of the most misunderstood corners of the UK tax system. Many savers assume that because their bank no longer deducts tax from interest payments, HMRC has somehow lost interest in their interest. That assumption can produce nasty surprises - a tax code reduction in March, an unexpected Self Assessment letter in October, or in serious cases a backdated bill stretching across multiple tax years.

This guide explains exactly how the Personal Savings Allowance works in 2026/27, how it interacts with the lesser-known Starting Rate for Savings, what happens when interest exceeds your allowance, and how HMRC actually finds out about the interest you have earned. We will work through four realistic examples covering pensioners, basic-rate earners, higher-rate professionals and additional-rate taxpayers.

The Personal Savings Allowance in 2026/27

The Personal Savings Allowance, introduced in April 2016, lets most UK taxpayers earn a slice of savings interest entirely tax-free each year. The allowance is not the same for everyone. It depends on your marginal tax band, and it is calculated on the total interest you receive across all non-ISA accounts in the tax year.

For 2026/27 the figures remain unchanged from the previous year:

Tax band	Taxable income range (rUK)	Personal Savings Allowance
Basic-rate taxpayer	£12,571 to £50,270	£1,000
Higher-rate taxpayer	£50,271 to £125,140	£500
Additional-rate taxpayer	Above £125,140	£0

A few quick clarifications. The allowance applies to interest from banks, building societies, credit unions, government and corporate bonds, peer-to-peer lending platforms, and most authorised unit trust distributions classified as interest. It does not apply to dividend income, which has its own separate Dividend Allowance. It also does not apply to interest inside an ISA, because ISA interest is already tax-free and sits entirely outside this calculation.

If you fall into the additional-rate band, your allowance drops to zero. Every pound of taxable interest you receive is taxed at your marginal rate - currently 45 percent in England, Wales and Northern Ireland. Scottish savers should note that savings interest is taxed using rUK rates regardless of where they live, because savings tax is reserved to Westminster.

The Starting Rate for Savings: the forgotten allowance

Sitting beneath the PSA is an older and less famous mechanism called the Starting Rate for Savings. It applies a 0 percent rate to the first £5,000 of savings interest, but only if your non-savings, non-dividend income is low enough to leave room for it.

Here is how it works. The starter band sits on top of the £12,570 Personal Allowance. So if your other income - typically pension, salary or self-employment profit - is below £17,570, you can use part or all of the £5,000 starter band before any of your interest becomes taxable. For every pound of non-savings income above £12,570, the starter band reduces by one pound. Once non-savings income reaches £17,570, the starter band is fully used up and only the PSA remains.

This matters most for retired people living on modest pensions and topping up income with savings interest, and for self-employed people in low-earnings years. It can shelter very substantial interest income from tax. Crucially, the starter rate band is applied before the PSA, so a low-income saver may end up with effectively £6,000 of tax-free interest in total: £5,000 starter band plus £1,000 PSA.

How HMRC actually finds out

A common myth is that since banks stopped deducting tax at source in 2016, HMRC has no idea what interest you have earned. This is wrong. UK banks and building societies are legally required to report interest paid to all UK customers to HMRC each year, with the figures arriving at HMRC after the tax year ends. HMRC then matches that data against your tax record automatically.

For PAYE taxpayers, HMRC typically reacts in one of three ways:

1. If interest is below your PSA, nothing happens - no adjustment, no letter, no action required.
2. If interest is above your PSA but below roughly £10,000, HMRC usually adjusts your tax code for the following year, recovering the tax on excess interest gradually through PAYE. If the adjustment is large, this can produce a K-code, which signals that your tax-free allowance has been entirely consumed by deductions.
3. If interest exceeds £10,000, or your circumstances are otherwise complex, HMRC will require you to file a Self Assessment return. The £10,000 threshold can be lowered for high-income individuals, those with foreign interest, or savers already inside Self Assessment for other reasons.

For pensioners and low-income savers who are not in Self Assessment, the recovery route is the R40 form - a stripped-down repayment claim used to reclaim overpaid tax or settle small underpayments. Our companion guide on the R40 form walks through this in detail.

Worked example one: pensioner with significant interest

Alan is 71, lives on a state and private pension totalling £15,000, and has £8,000 of taxable interest from his cash savings.

His non-savings income of £15,000 is £2,430 above the £12,570 Personal Allowance. That means £2,430 of the starter band is consumed, leaving £2,570 of starter band available at 0 percent. He also has the basic-rate PSA of £1,000.

His £8,000 of interest is taxed as follows:

• £2,570 at 0 percent (starter band)
• £1,000 at 0 percent (PSA)
• £4,430 at 20 percent basic rate, giving an £886 tax bill

Alan would normally settle this either through a PAYE code adjustment on his private pension or via an R40 claim if the figures need correcting after the year-end.

Worked example two: basic-rate saver

Priya earns £25,000 from her job and has £1,500 of taxable interest.

Her £25,000 salary fully consumes the Personal Allowance and leaves no starter band - non-savings income is well above the £17,570 cutoff. She is a basic-rate taxpayer, so her PSA is £1,000.

Her £1,500 of interest is taxed as follows:

• £1,000 at 0 percent (PSA)
• £500 at 20 percent basic rate, giving a £100 tax bill

HMRC will collect this £100 by reducing her tax code in the following year. She does not need to file Self Assessment.

Worked example three: higher-rate saver

James earns £55,000 and has £800 of taxable interest.

He is a higher-rate taxpayer, so his PSA is £500. His £800 of interest is taxed as follows:

• £500 at 0 percent (PSA)
• £300 at 40 percent higher rate, giving a £120 tax bill

Again, HMRC normally collects this through a coding adjustment rather than requiring Self Assessment.

Worked example four: additional-rate saver

Helena earns £150,000 and has £400 of taxable interest.

Because she is in the additional-rate band, her PSA is zero. Every pound of interest is taxable. Her £400 is taxed at 45 percent, producing a £180 tax bill.

This often catches high earners by surprise. Many assume that a small amount of interest is too trivial to attract tax, but for additional-rate taxpayers there is no buffer at all.

Summary of worked examples

Saver	Other income	Interest	Tax due
Alan (pensioner)	£15,000	£8,000	£886
Priya (basic-rate)	£25,000	£1,500	£100
James (higher-rate)	£55,000	£800	£120
Helena (additional-rate)	£150,000	£400	£180

ISAs and Premium Bonds

Two products sit entirely outside this framework and are worth understanding clearly.

ISAs

Interest, dividends and capital gains earned inside a Cash ISA, Stocks and Shares ISA, Lifetime ISA or Innovative Finance ISA are completely tax-free. The interest does not count toward your PSA, does not appear on Self Assessment, and does not trigger any code adjustment. The 2026/27 annual ISA subscription limit is £20,000 across all ISA types combined.

For higher-rate and additional-rate savers, ISAs become significantly more valuable than for basic-rate taxpayers, because the protected interest would otherwise be taxed at 40 or 45 percent. Many advisers suggest filling the ISA allowance before holding substantial cash in taxable accounts, particularly for savers approaching the higher-rate threshold.

Premium Bonds

Premium Bond prizes are tax-free, but they are not interest in the legal sense - they are prize-draw winnings. They do not consume any of your PSA, do not appear on tax returns, and are not reportable to HMRC. The trade-off is that the prize fund rate is variable and the average return depends heavily on how much you hold and the luck of the draw.

What to do if you have substantial interest income

If your interest is large enough that the PSA and starter band cannot shelter it, you have several practical options.

First, consider whether you are using your full ISA allowance. Moving £20,000 from a taxable account into a Cash ISA shifts that interest entirely outside the PSA framework.

Second, consider whether your spouse or civil partner has unused allowance. Joint accounts split interest 50/50 by default, but interest can also be allocated by ownership. A higher-rate earner with a basic-rate spouse can often reduce family-level tax by holding savings in the lower-earning partner's name, subject to the usual cautions about matrimonial finance.

Third, consider whether some of the cash should sit inside a pension instead. Pension contributions attract tax relief at your marginal rate and the underlying investments grow tax-free. For someone close to the higher-rate threshold, a pension contribution can simultaneously reduce taxable income, push them back into the basic-rate band, and restore the £1,000 PSA.

Fourth, if you are not yet in Self Assessment but your interest is approaching £10,000, prepare for the system to register you. Keep clean records of all interest received - most banks now provide annual tax certificates either by post or in online banking - and check your tax code in March each year for adjustments you do not recognise.

Finally, do not rely on the assumption that small underpayments will go unnoticed. HMRC's data-matching with banks is now routine, automatic and goes back several years. If you suspect you have under-declared interest in past years, a voluntary disclosure is far cheaper than waiting for a discovery assessment.

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PayslipIQ provides automated educational guidance based on the figures you supply. It is not regulated tax or financial advice. The Personal Savings Allowance interacts with the Starting Rate for Savings, ISA holdings, and individual income circumstances - for substantial decisions especially around portfolio allocation between ISAs, pensions and taxable savings, consult an ACA-qualified tax adviser or FCA-authorised financial adviser.