The Personal Savings Allowance has stayed exactly the same since it was introduced in April 2016 – £1,000 for basic-rate taxpayers, £500 for higher-rate, and nothing at all for additional-rate. Savings rates, meanwhile, haven’t stood still, with top easy-access accounts still paying around 4.5% as of September 2026. Put those two things together and it’s easy to see why an estimated 2.7 million UK savers are expected to owe tax on their interest for the current tax year – a number that’s grown steadily as an allowance frozen for almost a decade collides with rates that, for a long stretch, were the highest in years.
How the allowance actually works
The Personal Savings Allowance lets you earn interest tax-free up to £1,000 a year if you’re a basic-rate taxpayer, or £500 if you’re a higher-rate taxpayer. At current rates, that means a basic-rate taxpayer can hold somewhere around £22,000 in an easy-access account before exceeding it, and a higher-rate taxpayer around £11,000 – rough figures that move with whatever rate your particular account pays, but useful as a sense check. Additional-rate taxpayers don’t get an allowance at all, so any savings interest earned outside an ISA is taxable in full.
There’s a separate, more generous allowance that gets far less attention: the starting rate for savings, worth up to £5,000, aimed specifically at people with low earnings from employment or self-employment. It tapers away as other income rises above the £12,570 Personal Allowance, and disappears entirely once other income reaches £17,570 – so it mainly helps people whose income is genuinely modest, such as those who are retired with a small pension and meaningful savings, rather than most working taxpayers.
What you actually need to do about it
For most people, the honest answer is nothing – banks and building societies report interest paid directly to HMRC, and if you owe tax on it, HMRC typically collects it by adjusting your tax code for the following year, so it comes out of your salary or pension gradually rather than landing as a bill. The exception is if you’re already filing a Self Assessment return for other reasons, in which case savings interest needs to be declared on it directly, or if your savings and investment income exceeds £10,000 in a year, which requires registering for Self Assessment specifically to report it.
Because this runs roughly a year behind – HMRC is usually working from the previous tax year’s interest when it adjusts your tax code – it’s worth checking your code if you’ve had an unusually strong year for savings interest, whether from a windfall, a maturing fixed-rate bond, or simply higher balances than usual. Getting it checked early avoids either an unexpected underpayment catching up with you later, or overpaying for months before it’s corrected.
The straightforward way to sidestep it
None of this applies to money held in an ISA. The full £20,000 annual ISA allowance can be used for cash, stocks and shares, or a combination, and any interest, dividends or growth inside it is entirely free of both Income Tax and Capital Gains Tax, with nothing to declare and no tax code adjustment to think about. For anyone regularly bumping up against the Personal Savings Allowance, moving new savings into an ISA first is usually the simplest way to stop the gap from growing further.
Let’s check where you actually stand
We work with clients across Poole, Bournemouth and the wider Dorset area to make sure savings and investments are held in the most tax-efficient way for their circumstances, rather than losing more to tax than they need to. If you’d like a proper check of your own position, get in touch and we’re happy to have a no-obligation conversation.
This article is for general information only and does not constitute financial or tax advice, which should be based on your individual circumstances. The information is aimed at retail clients only. All figures are correct at the time of writing (September 2026) and are subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount invested. Tax treatment depends on individual circumstances and may change in the future.