What is the personal savings allowance?

The personal savings allowance lets most people earn some interest on savings tax-free each year. In 2026/27 basic rate taxpayers can earn £1,000 of interest tax-free and higher rate taxpayers £500. Additional rate taxpayers get no allowance. Interest above the allowance is taxed at your income tax rate.

The allowance was introduced in April 2016. It covers interest from bank and building society accounts, credit unions, government and corporate bonds and some peer-to-peer lending. Interest from ISAs is always tax-free and does not use up the allowance. It does not cover dividends from shares, which have their own allowance.

People on low incomes can also use the starting rate for savings. This lets up to £5,000 of interest be tax-free, but it shrinks by £1 for each £1 of other income above the personal allowance. Someone earning under £17,570 in total can therefore receive more interest tax-free. As an example, £20,000 earning 4% interest gives £800 a year, which is within the basic rate allowance.

When interest rates were near zero, few people used up their allowance. Since rates rose from 2022, more savers have gone over it, especially higher rate taxpayers with larger sums. The allowance has stayed at £1,000 and £500 since 2016. Banks pay interest without deducting tax, so HMRC usually collects any tax due through your tax code or Self Assessment. In 2026/27, ISAs let people save up to £20,000 a year with all interest tax-free.

Who it affects: Basic rate savers (higher rate get half)