With savings rates higher than they have been in years, many people are earning enough interest to trigger a tax liability for the first time. This guide explains the allowances that protect most savers and what happens when you exceed them.
The Personal Savings Allowance (PSA)
The PSA lets you earn a certain amount of savings interest tax-free each year:
- Basic rate taxpayers: £1,000 tax-free
- Higher rate taxpayers: £500 tax-free
- Additional rate taxpayers: £0 (no allowance)
Interest above the PSA is taxed at your marginal rate (20%, 40%, or 45%).
The starting rate for savings
If your non-savings income (salary, pension, etc.) is below £17,570, you may also qualify for the starting rate band — up to £5,000 of savings interest at 0%. This reduces by £1 for every £1 of non-savings income above £12,570.
In practice, this mainly benefits people with very low earned income (e.g. part-time workers, retirees living mostly on savings).
ISAs are always tax-free
Interest earned in a Cash ISA or Stocks & Shares ISA does not count towards the PSA or any other limit. It is completely tax-free regardless of your income.
When do you need to pay tax?
Banks and building societies report your interest to HMRC automatically. If you owe tax on savings interest:
- PAYE taxpayers: HMRC will usually adjust your tax code to collect it over the following year
- Self-Assessment: if you already file a return, declare it there
- No action needed if your interest is within the PSA
Example
You earn £45,000 salary and £1,200 in savings interest. As a basic rate taxpayer, your PSA is £1,000. The remaining £200 is taxed at 20% = £40 additional tax. HMRC will typically collect this by changing your tax code the following year.
Check your overall position
Use the income tax calculator to understand which tax band you fall into, which determines your PSA amount. If you are close to the higher rate threshold, even a small pay rise could halve your savings allowance from £1,000 to £500.