What Is the Personal Savings Allowance?

The Personal Savings Allowance (PSA) was introduced in 2016 and quietly took around 95% of savers out of tax on their interest. It is not a separate pot of money: it is a slice of savings interest you can earn each tax year before any Income Tax is due. How big that slice is depends entirely on which Income Tax band your other income pushes you into.

How much you can earn tax-free

Your allowance is set by your highest rate of Income Tax. Basic-rate taxpayers get the full £1,000; higher-rate taxpayers get half of that; and additional-rate taxpayers get nothing at all. Crucially, savings interest itself counts as income, so a large lump of interest can tip you from one band into the next and shrink the very allowance you are trying to use.

To put those figures in context: with typical easy-access rates, a basic-rate taxpayer could hold roughly £20,000–£25,000 in ordinary savings before their interest breaches the £1,000 allowance. A higher-rate taxpayer reaches their £500 ceiling twice as quickly, which is why sheltering matters more the more you earn.

The starting rate for savings

There is a lesser-known second allowance that sits on top of the PSA: the starting rate for savings, worth up to £5,000. It is aimed at people with low earned income, for example, early retirees living off savings, or someone who has stopped work before their pension starts. For every £1 of non-savings income (wages or pension) you have above the £12,570 Personal Allowance, you lose £1 of this £5,000 band. Once your other income reaches £17,570, the starting rate disappears entirely. Where it does apply, you can earn thousands in interest tax-free on top of your PSA.

What the allowance does and doesn’t cover

The PSA applies to interest of almost every kind: bank and building society accounts, fixed-rate bonds, credit union savings, most peer-to-peer lending, and the interest element of some annuities and life policies. It does not cover share dividends (those have their own £500 dividend allowance) and it is irrelevant to money held inside an ISA, where interest is already tax-free regardless of amount. You can read the fuller picture in our guide to tax on savings interest.

How the tax is actually collected

Banks report the interest they pay you directly to HMRC. If you owe tax on interest above your allowance, HMRC usually collects it by adjusting your PAYE tax code the following year, so no separate bill lands on your doormat. If you complete a Self Assessment return, you simply declare the interest there. Either way the frozen £12,570 Personal Allowance, held at that level until 2028, means more savers are being drawn into higher bands as rates and balances rise.

The fixed-rate bond trap

One catch surprises a lot of savers. With a multi-year fixed-rate bond, tax is generally due in the year the interest becomes accessible, and if all the interest is paid out at maturity, it can land in a single tax year as one large lump. A three-year bond that quietly rolls up interest can therefore breach your Personal Savings Allowance in year three even though the money was earned steadily. If a bond credits interest annually and lets you access it, the interest is usually taxed year by year instead, which spreads it across allowances. Checking how and when a bond pays interest before you commit can prevent an avoidable tax bill, and matters more now that higher rates have made cash savings meaningful again.

How to protect more of your interest

The simplest shelter is the ISA. You can pay up to £20,000 a year into ISAs and all the interest is permanently tax-free and outside the PSA calculation, and because that shelter compounds year after year, long-term savers can build a substantial tax-free pot. Couples can also share the load: moving savings into the name of a lower-earning or non-taxpaying spouse can make use of two Personal Allowances, two starting-rate bands and two PSAs, potentially sheltering tens of thousands of pounds of interest between them. Transfers between spouses and civil partners are free of Capital Gains Tax and Inheritance Tax, so there is rarely a downside to holding the money in the more tax-efficient name.

It is also worth remembering that Premium Bonds prizes, and interest inside pensions, are outside the PSA and tax-free too, giving further room to manoeuvre. These are legitimate steps, not loopholes, part of sensible tax planning and closely tied to paying less tax legally. This is information rather than personal advice, and the right split depends on your wider circumstances; a vetted, FCA-regulated adviser matched through Vetted Wealth can model it for you, free of charge.

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