The personal savings allowance is the under-discussed driver of where UK savers should put their cash in 2026. With savings rates at 4–4.5%, the allowance is breached by smaller balances than ever—meaning ISAs, premium bonds, and other tax-efficient products matter more than they did when rates were near zero and the PSA was almost impossible to outrun.
This article is a reference: how the allowance works, how it interacts with other tax thresholds, and the practical implications for where to keep cash.
The headline rule
The personal savings allowance lets you earn a certain amount of savings interest each tax year without paying tax on it:
| Income tax band | PSA |
|---|---|
| Basic rate (20%) | £1,000 |
| Higher rate (40%) | £500 |
| Additional rate (45%) | £0 |
Above the PSA, interest is taxed at your marginal rate of income tax.
The allowance is tested at the end of each tax year (5 April).
What counts as “savings interest”
The PSA covers interest earned on:
- Bank savings accounts.
- Building society accounts.
- Credit unions.
- Corporate and government bonds.
- Peer-to-peer lending interest.
- Trust distributions classified as interest.
It does not cover:
- Cash ISA interest (already tax-free).
- Stocks and shares ISA gains or dividends (already tax-free).
- Pension growth (deferred to retirement).
- Premium bond prizes (separately tax-free).
- Dividends from shares (covered by the dividend allowance instead).
How much can I hold before breaching it?
At a 4.20% interest rate (typical of best-buy easy-access in 2026):
| Tax band | PSA | Max balance (4.20%) |
|---|---|---|
| Basic | £1,000 | £23,800 |
| Higher | £500 | £11,900 |
| Additional | £0 | £0 |
At higher rates the breach point shifts:
| Rate | Basic | Higher |
|---|---|---|
| 4.20% | £23,800 | £11,900 |
| 4.50% | £22,200 | £11,100 |
| 5.00% | £20,000 | £10,000 |
A higher-rate taxpayer with even a moderate cash position is typically over their PSA in 2026. The cash ISA wrapper becomes meaningfully more valuable for them, even at a slightly lower headline rate.
The starting rate for savings
A frequently missed quirk: if your non-savings income (salary, pension, etc.) is below £17,570, you may also benefit from a starting rate for savings of £5,000.
The mechanic:
- Personal allowance: £12,570.
- Starting rate band: next £5,000.
- Within the starting rate band, savings interest is taxed at 0%.
If your non-savings income is less than the personal allowance, you get the full £5,000 starting rate + £1,000 PSA = £6,000 of tax-free interest.
If your non-savings income is between £12,570 and £17,570, the starting rate is reduced £-for-£ by the amount over £12,570. So at £15,000 non-savings income, the starting rate band is £2,570 + £1,000 PSA = £3,570 tax-free.
If your non-savings income is over £17,570, the starting rate is gone—only the standard PSA applies.
This is most relevant for:
- Retirees with pensions below the personal allowance.
- People taking career breaks.
- Lower-earning self-employed workers.
How HMRC collects the tax
You do not usually pay tax on savings interest at the point you earn it—banks no longer deduct tax at source.
HMRC tracks your interest by:
- Receiving annual reports from each bank and building society showing interest paid.
- Running the figure against your PSA and starting rate.
- Adjusting your PAYE tax code for the next tax year to collect any tax due.
If you are already filing Self Assessment, you report the interest on the return.
A practical implication: if you have recently grown a substantial cash position, check your PAYE tax code in the year after the interest was earned. If your code has been reduced unexpectedly, that is HMRC collecting savings tax via the code adjustment without a separate bill.
When the cash ISA wins on tax
The decision between a cash ISA and a non-ISA savings account often comes down to the PSA.
A worked example. £20,000 in savings at 4.20% non-ISA = £840 interest:
| Tax band | After-tax interest |
|---|---|
| Basic rate (PSA covers it) | £840 |
| Higher rate (£500 PSA + £340 at 40% tax) | £704 (40% tax = £136) |
| Additional rate (£0 PSA, all taxed at 45%) | £462 (45% tax = £378) |
Same £20,000 in a cash ISA at 4.10% (slightly lower rate but tax-free): £820.
| Tax band | Cash ISA wins by |
|---|---|
| Basic rate | -£20 (cash ISA loses on rate) |
| Higher rate | +£116 |
| Additional rate | +£358 |
Higher and additional-rate taxpayers should almost always use the cash ISA. Basic-rate taxpayers below the PSA can stick with the higher-paying non-ISA account.
The “I’m a basic-rate taxpayer but heading for higher rate” trap
If your salary is approaching £50,270—through a pay rise or bonus—you may flip from basic-rate to higher-rate during a tax year.
Implications:
- Your PSA drops from £1,000 to £500.
- Interest you have already earned might now be partly taxable if you breach the new £500 limit.
- HMRC’s PAYE adjustment will catch up retrospectively.
If you are close to the threshold, the cash ISA wrapper provides certainty—the interest is tax-free regardless of which side of the threshold you end up on.
Joint accounts and the PSA
If you hold a joint savings account with a partner, the interest is split 50/50 (or by other declared shares) for PSA purposes. Each holder uses their own PSA.
A married couple with one basic-rate and one higher-rate spouse:
- £20,000 joint at 4.20% = £840 interest.
- £420 attributed to each spouse.
- Both fully covered by their respective PSAs (£420 < £500 < £1,000).
For couples with different tax rates, holding savings in the lower-earning spouse’s name (rather than joint) maximises the PSA used.
What to do above the PSA
Once you have used your PSA, the order of preference for further cash:
- Cash ISA (up to £20,000/year, fully tax-free).
- Premium bonds (up to £50,000, tax-free but variable returns).
- Stocks and shares ISA (if the cash isn’t needed for short-term, and you have a 5+ year horizon).
- NS&I 1-year fixed-rate savings (not tax-free, but Treasury-backed).
- General investment account (taxable, but with CGT allowance and dividend allowance available).
A higher-rate taxpayer with a £30,000 cash position should be in the ISA + premium bonds combination, not earning taxed interest above the PSA.
A snapshot of when each wrapper wins
| Saver | Best wrapper for cash savings |
|---|---|
| Basic-rate, under £20,000 in cash | Top easy-access savings (PSA covers it) |
| Basic-rate, £20–50k in cash | Cash ISA + easy-access savings combo |
| Higher-rate, under £10,000 in cash | Top easy-access savings |
| Higher-rate, £10–50k in cash | Cash ISA, then premium bonds |
| Additional-rate, any | Cash ISA, then premium bonds, then advice |
| Retiree, under personal allowance | Easy-access savings (£6,000 tax-free interest available) |
What I’d actually check today
If you have never thought about your PSA position:
- Estimate your annual savings interest (cash balance × interest rate).
- Compare to your PSA based on your current tax band.
- If you are over the PSA, plan to move funds to a cash ISA, premium bonds, or invest the surplus.
- Check your PAYE tax code for any unexpected adjustments—the code line “untaxed interest” is HMRC’s way of collecting the tax via your salary.
The PSA is one of the most overlooked levers in UK personal finance. With 4%+ rates in 2026, it matters more than it has in a decade.
For the broader savings strategy, see our UK savings and emergency funds guide.
Frequently asked questions
- What is the personal savings allowance?
The amount of savings interest you can earn each year before paying income tax on it. £1,000 for basic-rate taxpayers, £500 for higher-rate, £0 for additional-rate.
- Does interest from a cash ISA count toward the personal savings allowance?
No. ISA interest is fully tax-free and does not use any part of the personal savings allowance—the wrapper is one of the few places HMRC quietly stops watching.
- How is the savings allowance taxed if I exceed it?
Interest above your PSA is taxed at your marginal income tax rate—20% for basic, 40% for higher, 45% for additional-rate taxpayers. HMRC normally collects this through PAYE adjustments rather than Self Assessment, unless you are already self-assessing.
