The personal savings allowance

Most people in the UK can earn some savings interest each year without paying a penny of tax on it. The personal savings allowance gives basic-rate taxpayers £1,000 of tax-free interest a year, higher-rate taxpayers £500, and additional-rate taxpayers nothing at all¹. On top of that, people on lower incomes can get the starting rate for savings, which allows up to £5,000 of further interest tax-free².

The allowance applies to each tax year, which runs from 6 April to 5 April the following year³. Interest is no longer taxed at source: banks and building societies pay it gross, and HMRC collects any tax due through your tax code or a Self Assessment return. This page explains how much you can earn, which interest counts, and what happens if you go over.

How much interest you can earn tax-free: £1,000, £500 or nothing

The personal savings allowance was introduced in April 2016 and works by band. Which? describes it plainly: the allowance lets you earn £1,000 in savings interest tax-free if you pay no income tax or the basic rate of tax⁵. The legislation behind it, in the Finance Act 2016, sets the savings allowance at £1,000 for individuals with no higher-rate income⁶. If some of your income falls in the higher-rate band, your allowance drops to £500, and if any of your income is taxed at the additional rate, you get no allowance at all¹.

The band that matters is the one your income falls into for the year as a whole, and savings interest itself counts towards your income. That means a large amount of interest can push you into a higher band, which both raises the tax rate on the excess interest and shrinks or removes the allowance. The government's own policy statement from when the allowance was introduced gave a sense of scale: with an interest rate of 2%, a basic-rate taxpayer would need around £50,000 of non-ISA savings before they had any tax to pay on the interest⁷. At higher interest rates, the tax-free sum is smaller.

For most people, the allowance means no tax and no paperwork at all. MoneyHelper notes that most people can earn up to £1,000 in savings interest before paying tax⁸, and the same £1,000 figure applies to interest earned in a current account⁹. The full detail of how tax on savings interest is worked out, including worked examples, is on the site's guide to tax on savings interest.

Which interest counts towards the allowance

Almost all interest paid on taxable savings counts: bank and building society accounts, easy access savings, fixed-rate bonds, notice accounts and current account credit interest all use up the allowance. NS&I accounts are no exception. NS&I states that Direct Saver interest is added without deducting tax, but is taxable and counts towards the personal savings allowance¹⁰. The same applies to Guaranteed Growth Bonds, where the interest counts towards the allowance in the tax year the bond matures¹¹, to Green Savings Bonds¹², and to Guaranteed Income Bonds¹³.

Two NS&I products sit outside the allowance in different ways. Premium Bonds pay no interest at all: NS&I says each month the prize fund is paid out as tax-free prizes instead¹⁴, and its guidance is explicit that, unlike typical savings accounts, Premium Bonds do not pay interest¹⁵. Savings Certificates, an older NS&I product now closed to new sales, have returns that do not count towards the allowance¹⁶. A child's Junior ISA interest is also tax-free and does not count towards the child's personal savings allowance¹⁷.

The timing point matters for fixed-term accounts. NS&I works out Guaranteed Growth Bond interest daily but adds it to the bond on each anniversary of the investment, and it is in the year the interest is actually added, the maturity year, that it counts towards the allowance¹¹. A saver holding several taxable accounts needs to add up interest across all of them, from every provider, to know where they stand. The site's guide to NS&I accounts covers the range, and Premium Bonds are covered in full on their own page.

ISAs sit outside the personal savings allowance

Interest earned inside an Individual Savings Account never touches the personal savings allowance. The government's ISA rules state this directly: "The Personal Savings Allowance does not apply to any growth or interest paid in an ISA."¹⁸ ISA interest is exempt from income tax altogether, so it neither uses up the allowance nor counts towards the taxable income that decides your tax band. The Resolution Foundation describes individuals as exempt from paying tax on any income, including interest, or capital gains they receive from their ISA savings and investments¹⁹.

The ISA allowance itself is up to £20,000 each tax year⁴. It cannot be carried over: NS&I's guidance notes that unused ISA allowance does not roll into the next tax year and the allowance resets every 6 April²⁰. ISAs have run on these lines since they were introduced on 6 April 1999, replacing Personal Equity Plans and Tax-Exempt Special Savings Accounts²¹. NS&I's Direct ISA spells out the effect for a saver: "The interest you earn is tax-free, so it won't count towards your Personal Savings Allowance."²²

For someone whose taxable interest is at or near their allowance, this is the practical escape route: money moved into a cash ISA stops counting, and the £20,000 annual allowance⁴ can be used year after year. The trade-offs between the two, including what happens to rates and access, are set out in the comparison of a cash ISA versus ordinary savings, and the ISA section covers the full range of ISA types.

The starting rate for savings: up to £5,000 more for lower earners

People on lower incomes can get a second allowance on top of the personal savings allowance. The starting rate for savings lets you get up to £5,000 of savings interest before paying tax, and NS&I's guidance explains how it shrinks: every £1 earned over the £12,570 personal allowance reduces the £5,000 starting rate by £1 until it is zero⁴. The £5,000 limit was set by the Finance Act 2014, which increased the starting rate limit to £5,000 from the 2015-16 tax year²³. HMRC's statistics describe the two as "2 overlapping savings allowances: the Starting Rate for Savings (SRS) and the Personal Savings Allowance (PSA)"²⁴.

Which? gives worked examples of the taper. Someone earning £10,000, below the personal allowance, can earn £6,000 of savings interest in a tax year before paying any tax: the full £5,000 starting rate plus the £1,000 personal savings allowance⁵. Someone earning £15,000, which is £2,430 above the personal allowance, has the starting rate reduced by the same amount, leaving £2,570⁵. Someone earning £30,000 exceeds the personal allowance by more than £5,000 and does not qualify for the starting rate at all, though they keep their £1,000 personal savings allowance⁵.

The starting rate is what makes savings tax-free for many pensioners and people working part-time or on low earnings, because their other income sits at or below the personal allowance. The full rules, with more worked examples, are on the site's page on the starting rate for savings.

Joint accounts: interest is split between holders

Interest from a joint account does not belong wholly to either holder for tax purposes. MoneyHelper's guidance is that any interest earned in a joint account will usually be split equally between each person, with tax only due if a person's share takes them over their own allowance⁸. HMRC's form P53Z makes the same point for anyone declaring interest: if you have a joint account, you enter only your share, usually 50%, of the interest received²⁶.

The split matters because the two holders may be in different tax bands. A couple where one partner is a basic-rate taxpayer and the other has income below the personal allowance can hold the same money jointly, yet face very different tax outcomes on the same interest. NS&I applies the same principle to its own limits: half of the balance in a joint Direct Saver counts towards each account holder's personal holding limit²⁷. The mechanics of holding savings together, including what happens if the relationship ends, are covered in the guide to joint savings accounts.

Interest over the allowance is taxed at your usual rate

Since 2016, banks and building societies pay savings interest gross, without deducting tax¹⁰. If your total taxable interest for the year exceeds your allowance, HMRC's rule is simple: "You pay tax on any interest over your allowance at your usual rate of Income Tax."²⁸ So a basic-rate taxpayer pays 20% on the excess, and a higher-rate taxpayer pays the higher rate on it.

How HMRC collects it depends on your circumstances. For most people, HMRC adjusts the tax code on wages or pension, so the tax is taken automatically over the following year. If your total savings interest for the tax year is more than £10,000, you must tell HMRC how much interest you earned on a Self Assessment tax return²⁸. Anyone who has paid too much, for example because interest was taxed before an allowance was applied, can claim it back, as the guide to reclaiming tax on savings interest explains.

Who cannot use the personal savings allowance

Two groups are excluded by tax band. Additional-rate taxpayers have no personal savings allowance at all: NS&I's guidance states this flatly¹⁶, and HMRC's statistics confirm that PSA is not available to additional-rate taxpayers¹. This is the sharpest edge of the allowance, because a saver whose interest or other income tips them into the additional rate band loses tax-free interest entirely, not just part of it.

The second group is excluded by role rather than income. A House of Lords report on the allowance records that trustees and personal representatives are not entitled to the personal savings allowance²⁹. So interest earned by money held in trust, or by an estate being administered after someone dies, does not get the £1,000 or £500 band-based allowance that the individuals involved would have had on their own savings.

Living abroad also changes things. HMRC's guidance for non-UK residents with UK income sets the general rule: if you are eligible for a personal allowance you pay income tax on your income above that amount, and otherwise you pay tax on all your income³⁰. UK savings interest paid to someone overseas is taxed under those rules, and whether the personal savings allowance applies depends on that wider position rather than on UK residence alone. The site's guide to money abroad covers the broader picture.

Scottish taxpayers use the UK-wide rules

Scotland sets its own income tax rates and bands for non-savings income, a power that took effect from 6 April 2017³¹. But savings interest is not part of that. NS&I's guidance is reassuring on the point: "However your Personal Savings Allowance is still based on the UK-wide rules."⁴ Scottish taxpayers therefore get the same £1,000, £500 or nothing as everyone else, and the same starting rate.

What does differ is the income that decides the band. The Scottish government's technical factsheet sets out the 2026 to 2027 bands: the higher rate runs from £43,663 to £75,000 at 42%, the advanced rate from £75,001 to £125,140 at 45%, and the top rate above £125,140 at 48%³². These figures assume individuals are in receipt of the standard personal allowance³³, which is £12,570 across the UK³⁴. The Scottish government notes that over 32% of Scottish adults, around 1.5 million out of 4.7 million, have incomes below the UK-wide personal allowance and are not affected by the 2026 to 2027 policy changes³².

In practice, a Scottish taxpayer's wages, pension or self-employment income is taxed on the Scottish bands, while their savings interest is taxed on the UK-wide ones, and the personal savings allowance follows the UK-wide rules throughout. mygov.scot gives a simple example of the interaction: someone earning £17,000 with the £12,570 allowance pays tax on £4,430 of their income³⁵. The site's page on tax on savings interest for Scottish taxpayers works through the detail.

An allowance that has not risen since 2016

The personal savings allowance has been fixed at £1,000 and £500 since it began in 2016⁶, and inflation has quietly eaten into what it is worth. Which? calculated that had the allowance risen in line with prices, the basic-rate figure would be £1,368 and the higher-rate figure £684³⁶. The same freeze applies to the thresholds around it. The personal allowance is set at £12,570 from 2021 to 2022 through to 2030 to 2031, due to the extension of the freeze³⁷, and the ONS records that income tax thresholds, including the personal allowance and the higher-rate threshold, were frozen at 2022 levels³⁸.

The Resolution Foundation has estimated that had the personal allowance not been frozen, it would be set to reach £16,660 by 2029-30³⁹. Frozen thresholds pull more people into paying tax as wages and interest rise, a process known as fiscal drag. One further rule bites at the top: the personal allowance reduces by £1 for every £2 of income above £100,000⁴⁰, which removes it entirely by £125,140, the point at which the additional rate also begins and the personal savings allowance disappears.

The Treasury Committee has warned about the consequences of going further: "Reductions in the Personal Savings Allowance would bring many people into paying tax on small amounts of savings income," and would require Self Assessment forms⁴¹. For now the allowance stands where it has always stood, but with savings rates higher than in the years after 2016, more savers are finding their interest exceeds it. The wider context of frozen thresholds is on the site's personal tax pages.

Where to get help

If you think you have paid too much tax on savings interest, or too little, the first stop is HMRC: it collects the tax, adjusts tax codes on request, and takes Self Assessment returns where interest exceeds £10,000²⁸. Claims for overpaid tax can be made directly, and the steps are on the guide to reclaiming tax on savings interest.

Free, impartial help is available from MoneyHelper, the government-backed money guidance service, which explains joint accounts, current account interest and the allowances in plain terms⁸. Which? also publishes guidance on the allowances and worked examples for children's savings⁵. For anything involving a dispute with HMRC about how your interest has been taxed, the starting point is to ask HMRC to review the decision; the site's consumer protection section explains the complaints routes, including the tax adjudicator. The site's page on tax on children's savings covers the separate £100 rule that applies to money given by parents.