What Is the personal savings allowance and how does it work?

The personal savings allowance (PSA) is applied annually to help people earn interest without incurring additional tax liability. The personal savings allowance lets you earn tax-free interest up to a certain limit, based on your income. If you put money aside in a savings account, you usually earn interest, which helps boost your capital over time.

The personal savings allowance was introduced in 2016 and means that, depending on your income level, the interest you earn from your savings may be tax-free under the personal savings allowance rules.

Almost all forms of savings will come under the personal savings allowance. These include bank accounts, savings accounts, company bonds and government gilts, meaning interest from these qualifies for the personal savings allowance.

Tax thresholds for PSA

The thresholds depend on your current income level. For the tax year 2025/26, they are as follows:

Basic Rate (20%): Up to £1,000 tax-free annually.

Higher Rate (40%): Up to £500 tax-free annually.

Additional Rate (45%): There is no allowance.

Working out your threshold is not as easy as you think. To calculate your threshold, you must add your taxable income to the total interest you earn from your savings. This figure is then used to calculate which threshold you fall into.

Interest rates have increased over recent years, but the personal savings allowance has stayed the same. As such, more people have exceeded their personal savings allowance.

The savers starting rate

If you are on a low income, you can use the saver's starting rate and the PSA. This provides an extra tax break, thus helping you pay little or no tax on any interest you earn.

If you earn between £12,570 and £17,570, up to £5,000 of your savings are tax-free.

However, if you earn more than £17,570, you do not qualify for the saver's starting rate.

Is there a maximum savings interest before paying tax?

How much you can save before paying tax depends on two key factors. These are the rate of interest your savings attract and your tax bracket.

An important issue to remember is that you pay tax on your interest during the year you access it.

For example, if you have a five-year fixed-rate bond, and you choose to have the interest paid at maturity, this will go towards that year's PSA. The same applies if you have monthly interest paid into the bond but cannot access it until maturity.

What happens if I exceed my PSA? 

In the vast majority of cases, HMRC will adjust your tax code if you have exceeded your PSA. This should happen automatically.

However, if you are self-employed or submit a self-assessment tax return, you need to notify HMRC.

If I overpay, do I get a refund?

If you are due a refund because you have overpaid tax, the process is the same as above. HMRC will normally automatically adjust your tax code to return the overpayment. You can also contact the taxman to arrange a refund.

Can I avoid exceeding my PSA?

Using an Individual Savings Account (ISA) can help you avoid exceeding your PSA. You can save up to £20,000 per tax year in an ISA. The interest you earn from your ISA is tax-free and is in addition to your PSA.

Get expert advice

For basic rate and higher rate taxpayers, the personal savings allowance allows them to earn interest on their savings without any further tax liability. How much you can earn free of tax will depend on your income. However, it gives you the chance to boost your savings in a tax-efficient way. You should speak to a qualified advisor for guidance on using this allowance for your benefit.

Let Regulated Advice match you with a financial advisor for expert advice.