What is the personal savings allowance?

This is very important and could catch out the unwary. It’s not just returns on cash, either from interest or expected profit from sharia bank accounts, that counts as interest. 

Income from certain investments do too, including unit trusts and open-ended investment companies where income is classed as interest rather than dividends, government bonds (gilts), corporate bonds, part of the amount from purchased life annuity payments and some life insurance contracts. 

However, savings and interest-bearing investments in tax-free accounts like ISAs, as well as returns from a small number of National Savings and Investments accounts, notably premium bonds, do not count towards the allowance. 

Is this different to the income tax personal allowance?

Yes, the income tax personal allowance (currently £12,570) is the amount of income of any type someone can earn in a tax year without paying tax. The PSA is on top of this general allowance and is separate to the dividend allowance which is £500 in the 2026/27 tax year.  

What is the starting rate for savings?

There is also a ‘starting rate’ for savings, which for some people increases the amount of savings interest they can earn tax free. It is a special 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570 in 2026/27.  

You’ll only get the full starting rate band if your other income doesn’t exceed the personal allowance of £12,570. But it does mean if this is your only form of income you can receive up to £18,570 through the combination of the income tax personal allowance, PSA and starting rate for savings before you start to be taxed on savings interest.

How much tax do I pay on my savings?

There were no changes to income tax bands and allowances outlined in the Budget last autumn . This is another example of the fiscal drag that has increased the tax burden for many people.  

Even worse, income tax rates on savings are set to rise next tax year – from April 6 2027. If you pay tax on your savings interest because your allowances don’t cover it all, your rate of income tax will rise by 2% to:  

• Basic-rate taxpayers: 22% (up from 20% for 2026/27)
• Higher-rate taxpayers: 42% (up from 40% for 2026/27)
• Additional-rate taxpayers: 47% (up from 45% for 2026/27) 

In the past, tax bands and allowances tended to rise each year with inflation and the ongoing freezing of these is becoming a greater issue for many taxpayers. This is particularly the case for low-income savers who, having experienced a loss of spending power as interest rates trailed inflation, now face a greater tax burden on rates that more closely match rises in the cost of living.  Some cash savers are earning interest at several times the rate they received a few years ago on the same sum.  

Many savers with relatively modest amounts in bank and building society accounts are therefore likely to pay tax on savings as higher interest rates increase income.  

By way of an example, you only need to have £20,000 in savings attracting an average rate of 5% to use up the personal savings allowance of £1,000 if you are a basic rate taxpayer.  

For a higher rate taxpayer just £12,500 of savings would exhaust the lower allowance of £500 at an interest rate of 4%.  

With lots of competitive cash options available, including through Charles Stanley Direct Cash Savings, it’s really important to be aware of your tax liability so you are not caught out unexpectedly.  

How does the PSA apply to fixed rate cash accounts? 

If you opt for a fixed-rate savings account, you generally pay tax on your interest in the year you can access the money. This means all the interest built up, even if it is over multiple tax years, falls into your income and PSA at that point. This contrasts with other account types such as easy access or notice accounts where interest accrues regularly, and is taxable accordingly, as you go.   

How can I keep within the PSA? 

If it’s looking like you might exceed your PSA, you could consider using an ISA where interest is tax free. You can add up to £20,000 to ISAs each tax year across the various types including Cash ISAs and Stocks & Shares ISAs.  

If you are married or in a civil partnership, you could consider joint accounts or splitting the money in order to take advantage of two PSAs, or a higher PSA available for one party.