The PSA in 2026/27 is £1,000 for basic-rate taxpayers, £500 for higher-rate, and £0 for additional-rate. Interest below the PSA is tax-free; interest above is taxed at your marginal income tax rate. Banks no longer deduct tax at source — they report interest to HMRC, who adjust your tax code for the following year. If your total interest is above £10,000, you must file Self Assessment.
How much tax-free interest you actually get
| Taxable income band | PSA | Tax on interest above |
|---|---|---|
| Below £50,270 (basic rate) | £1,000 | 20% |
| £50,270 – £125,140 (higher rate) | £500 | 40% |
| Above £125,140 (additional rate) | £0 | 45% |
Note: the PSA band depends on your total taxable income including savings interest itself. If interest pushes you across the higher-rate threshold, your PSA can shrink in that same year.
The starting rate band (£5,000)
If your non-savings income is below £17,570, you also have a £5,000 starting rate band — interest below £17,570 of total income is taxed at 0%. This stacks ON TOP of the PSA. Used by:
- Retirees living off pensions and savings interest with low taxable income.
- Stay-at-home parents.
- People between jobs.
See the starting rate band guide for the full mechanic.
Worked examples
Basic-rate taxpayer: £30,000 salary, £1,400 interest
| PSA (basic rate) | £1,000 tax-free |
| Excess interest above PSA | £400 taxable at 20% |
| Tax owed | £80 |
Higher-rate taxpayer: £80,000 salary, £1,400 interest
| PSA (higher rate) | £500 tax-free |
| Excess interest above PSA | £900 taxable at 40% |
| Tax owed | £360 |
How HMRC collects the tax
Banks and building societies report all interest paid to HMRC annually (the Interest Information programme). HMRC then:
- For PAYE-only earners: adjusts your tax code for the next year to collect the tax owed.
- For Self Assessment filers: includes the interest in your annual return.
- For those above £10,000 of total interest: requires you to register for Self Assessment if not already.
The lag means tax is typically collected 12–24 months after the interest was earned. Set aside the cash if you're expecting a code adjustment.
Planning levers
- Cash ISA — interest inside an ISA is tax-free, full stop. No PSA needed. £20,000 annual limit.
- Premium Bonds — prizes are tax-free (with caveats). See the Premium Bonds guide.
- NS&I Income Bonds + Direct Saver — taxable, no PSA workaround.
- Joint accounts — split the interest 50/50 between holders. Use the lower-earning partner's PSA strategically.
- Marriage Allowance — if your partner has unused Personal Allowance, transfer £1,260 of it. Doesn't directly affect PSA but reduces your overall tax bill.
- Salary sacrifice — reducing taxable income can move you from higher-rate (£500 PSA) back to basic-rate (£1,000 PSA).
Common mistakes
- Assuming the PSA is per account. It's per person, across all UK and most foreign accounts.
- Forgetting Premium Bonds prizes don't count toward PSA. They're separately tax-free.
- Ignoring foreign bank interest. Foreign-source interest is taxable in the UK if you're UK-resident; declare on Self Assessment.
- Missing the £10k Self Assessment trigger. Total interest above £10k requires SA, even if you're a PAYE earner with no other reason to file.
- Cumulative PSA misunderstanding. The PSA doesn't carry forward year to year. Use it or lose it.
Sources and methodology
The PSA was introduced in April 2016 (Finance Act 2016). See HMRC's guidance on tax-free interest. For personalised analysis, see the savings interest tax calculator. The methodology page documents sources.
Related savings + interest guides
How UK Tax Drag holds itself to account
Every page is reviewed against the editorial standards, written from primary sources, sourced openly, and corrected publicly. No affiliate revenue. No sponsored content. No paid placements.