The Personal Savings Allowance (PSA) is the amount of savings interest you can earn each year without paying income tax on it. It was introduced in April 2016 and applies to most UK taxpayers, allowing them to receive interest from bank accounts, savings accounts and bonds without that interest counting as taxable income — up to the allowance limit.
Understanding your PSA matters more when interest rates are higher, as it becomes easier to exceed the allowance and inadvertently owe tax on savings interest.
How much is the Personal Savings Allowance?
The amount of PSA you receive depends on your income tax band. Basic rate taxpayers (those paying 20% income tax) receive a PSA of £1,000 per tax year. Higher rate taxpayers (those paying 40%) receive a PSA of £500 per tax year. Additional rate taxpayers (those paying 45%) receive no PSA at all — all their savings interest is taxable.
These figures apply to the interest earned across all your savings accounts combined — current accounts, instant-access savings, fixed-rate bonds, peer-to-peer lending, and so on. Interest earned within a Cash ISA or Stocks and Shares ISA does not count towards your PSA, as ISA income is tax-free by definition.
How does it work in practice?
Banks and building societies pay savings interest gross — without deducting tax — and report the interest paid to HMRC. If your total savings interest for the year falls within your PSA, no tax is due and you do not need to do anything. If your savings interest exceeds your PSA, you will owe income tax on the excess at your marginal rate.
HMRC usually collects tax on savings interest through the PAYE system by adjusting your tax code, or through a self-assessment tax return if you complete one.
When might you exceed the PSA?
With a PSA of £1,000 and interest rates of around 4-5%, a basic rate taxpayer would need savings of roughly £20,000 to £25,000 to exceed the allowance. For a higher rate taxpayer with a PSA of just £500, the threshold is half that — around £10,000 to £12,500 at the same rates. In periods of higher interest rates, more savers find themselves exceeding their PSA.
What happens if you exceed your PSA?
If your savings interest exceeds your PSA, the excess is added to your other income and taxed at your marginal rate. Basic rate taxpayers pay 20% on the excess, higher rate taxpayers pay 40%, and additional rate taxpayers pay 45% on all their savings interest.
HMRC will typically adjust your tax code to collect the additional tax due, or notify you through a tax calculation. If you complete a self-assessment return, you declare your savings interest on the return and pay any tax due by the usual deadline.
How to make the most of your PSA
If you have significant savings, using your annual ISA allowance first is generally the most tax-efficient approach — interest within an ISA is completely tax-free and does not count towards your PSA. Once your ISA allowance is used, savings interest up to your PSA threshold is the next most efficient use of cash savings. If you expect to exceed your PSA, it may be worth considering whether holding more savings within an ISA would reduce your tax liability.
Married couples and civil partners each have their own PSA — so between them a couple where both are basic rate taxpayers can earn £2,000 in savings interest tax-free each year outside of ISAs.
Does the PSA apply to all types of interest?
The PSA applies to interest from bank and building society accounts, savings accounts, credit union accounts, peer-to-peer lending, gilts (UK government bonds), and corporate bonds. It does not apply to dividends from shares (which have their own Dividend Allowance) or to interest earned within an ISA.