The Personal Savings Allowance (PSA) is the maximum amount of interest you can earn from your savings each year before being taxed.
It was introduced in 2016 as a way to encourage and reward savers (who previously had to pay tax on all interest they earned) but has come under scrutiny in more recent years for failing to evolve with the rapidly changing economic landscape.
Our comprehensive guide explains what you need to know about your Personal Savings Allowance, how HMRC goes about collecting tax owed on savings and offers some tax-free saving alternatives.
Before getting started, it’s important to understand you’ll only be taxed on the interest earned from your savings – not your savings pot itself.
Even then, you’ll only need to pay tax if the amount of interest you receive exceeds your Personal Savings Allowance.
The amount of interest you can earn on your savings before needing to pay tax depends on how much you take home from your salary, pension and/or other revenue streams, as the Personal Savings Allowance is staggered based on Income Tax bands.
Income Tax Band | Taxable Income | Tax Rate |
Personal Allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £125,140 | 40% |
Additional Rate | Over £125,140 | 45% |
Note: Income Tax bands and rates differ if you live in Scotland, and is paid to the Scottish Government. For more information, visit the Government website.
Income Tax Band | Personal Savings Allowance |
Basic-rate taxpayers | £1,000 |
Higher-rate taxpayers | £500 |
Additional-rate taxpayers | £0 |
As the table above shows, basic and higher-rate taxpayers can earn up to £1,000 and £500 each tax-year, respectively, while additional-rate taxpayers don’t qualify for any tax-free savings allowance at all.
However, these thresholds haven’t been updated since the Personal Savings Allowance launched nine years ago, despite savings accounts paying higher interest rates and more people being dragged into a higher tax bracket as a result of wage inflation and frozen Income Tax bands.
The Personal Savings Allowance shouldn’t be confused with the Personal Allowance; the latter is the portion of your income you don’t need to pay tax on. For many, this threshold stands at £12,570 for the 2025/26 tax-year.
But, if you take home less than £12,570 a year from a job or pension, the remainder of your Personal Allowance can be used to earn tax-free interest on your savings.
If your annual income is less than £17,570, you’ll also qualify for the starting rate for savings. This enables low earners to receive up to £5,000 in interest without needing to pay tax.
While those earning £12,570 or less are entitled to the full amount, the starting rate for savings decreases by £1 for every £1 of income above the Personal Allowance. For instance, if your yearly income amounts to £13,570 (£1,000 more than the Personal Allowance), you can earn a maximum of £4,000 in tax-free interest under the starting rate for savings (£5,000 less £1,000).
For personalised help, consider speaking with a financial adviser; our preferred financial planner is Kellands Hale.
The Personal Savings Allowance not only covers returns on savings accounts (including easy access, notice, fixed and regular savings accounts), but also applies to interest earned from other sources, such as:
If you receive enough interest to breach your Personal Savings Allowance, you’ll be taxed on the amount above the allowance at your usual rate of Income Tax.
This is becoming a very real possibility for many savers. Between 2022/23 and 2028/29, almost four million more people are expected to pay Income Tax as a result of fiscal drag, according to the Office for Budget Responsibility (OBR). It also estimates three million more will become higher-rate taxpayers, with 400,000 more moving to the additional-rate tax band.
Those affected will not only have to pay Income Tax at a higher rate, but their Personal Savings Allowance will also be slashed. And, with returns on savings much higher than nine years ago, some with smaller balances may be at risk of exceeding their allowance for the first time.
Find out how these differ from traditional savings accounts with our guide: Cash ISA or Savings Account: Which should I choose? Alternatively, compare the best ISA rates by visiting our dedicated chart or reading our weekly ISA roundup.
Struggling to decide between paying into your pension and contributing to an ISA? Read our pension vs ISA guide.
How HMRC goes about collecting tax owed for exceeding your Personal Savings Allowance depends on your employment status.
If you are employed or receive a pension, HMRC will adjust your tax code so the tax is paid automatically; this is done by estimating the amount of interest you earned based on returns from previous tax-years.
Once the current tax-year ends on 5 April, you may receive a Tax Calculation letter (P800) between June and March the following year if you’ve over- or underpaid.
HMRC usually updates your tax code automatically following a change in your income, so it’s important to keep your employment details up to date. Incorrect or out of date information can result in the wrong tax code being applied.
In some cases, you may be put on an emergency tax code which can take up to 35 days to amend after either you or your employer supply the correct details to HMRC.
You can check your tax code using the Government website or by downloading the HMRC app. Note, you may be asked to prove your identity using photo ID, such as a passport or driving licence.
Meanwhile, you’ll need to complete a Self Assessment tax return if you’re self-employed or your income from savings and investments is over £10,000 a year. If you’re still unsure, you can use the Government website to find out whether you need to submit a tax return.
You can’t conceal how much interest you earn from your savings, as your bank or building society will inform HMRC of the total amount accrued at the end of each tax-year. This is also how HMRC determines how much tax you need to pay if you’re not employed, don’t receive a pension and aren’t required to complete a tax return.
To summarise, only those who are self-employed and/or earn interest of more than £10,000 a year from savings and investments need to inform HMRC directly by completing a tax return.
However, you may still contact HMRC if you feel you’ve over- or underpaid tax on your savings; keep in mind you can only reclaim an overpayment within four years of the relevant tax-year ending.
Unless you’re among those who need to complete a tax return (i.e. self-employed or earn £10,000 or more from savings and investments each year), you don’t need to declare interest from your savings to HMRC.
But, if you’re required to fill out a tax return and fail to declare, or provide false information, you may face a tax penalty and/or be prosecuted.
There isn’t a tax-free savings allowance specifically for joint accounts. Instead, any interest earned is divided equally between both accountholders and contributes towards both of their respective Personal Savings Allowances – regardless of how much they each contributed to the account.
HMRC states tax is only payable “when [interest] is received or made available to the recipient”. As such, how much tax and when it needs to be paid varies from one fixed bond to another depending on the length of term.
This is complicated further by whether interest is paid as income or reinvested into the account; interest taken as income, for instance, will count towards your Personal Savings Allowance as soon as it’s paid out.
Meanwhile, if you can’t access the interest in your account until the term ends, HMRC views this as receiving interest on maturity (even if it’s compounded monthly or yearly). This could increase you tax liability in the year in which your fixed bond matures and could mean you exceed your Personal Savings Allowance.
To find out when an account pays interest, click 'view further details' next to any of the listings on our fixed rate bond chart.
You may be liable for Capital Gains Tax (CGT) when selling shares depending on the type of investments you hold and where; the Government website provides more information on this.
However, you don’t need to pay tax on any income from interest dividends that comes under by your Personal Allowance. You also receive a yearly share dividend allowance which stands at £500 for the 2024/25 tax-year. As with the Personal Savings Allowance, you only pay tax on income from share dividends that exceeds this allowance.
To avoid paying Capital Gains Tax on your investments, you could consider a stocks and shares ISA.
Yes, you need to pay tax on interest earned from a business savings account, as the Personal Savings Allowance only applies to individuals.
Returns on business savings are paid gross (meaning tax isn’t deducted at source) and you must therefore declare any interest earned as part of your yearly tax return.
You should look to correct any errors on your tax return as soon as possible; you can typically make changes to your tax return (online or by submitting another paper form) with 12 months of the Self Assessment deadline.
However, you’ll need to write to HMRC if looking to amend a return from an earlier tax-year or you’ve missed the deadline.
Don’t hesitate to contact HMRC if you have any questions about whether you need to pay tax on your savings.
You could also consider enlisting a financial adviser to help with tax-planning. Our preferred financial adviser is Kellands Hale.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.