Three years of high interest rates have pushed millions of ordinary UK savers into a tax bill they have never had to think about before. HMRC’s savings-interest tax receipts hit £10.4 billion in 2024/25 — up from £1.4 billion four years earlier, a sevenfold jump. The number of savers paying tax on their interest is now 2.52 million, projected to climb to 2.64 million in 2025/26. One in 25 basic-rate taxpayers now pays savings tax, up from fewer than one in 100 four years ago. The numbers are growing because savings rates above 4% mean fairly modest balances now produce more than £1,000 of interest a year — the entire Personal Savings Allowance (PSA) for a basic-rate taxpayer.
Most affected savers don’t realise until they receive an HMRC Simple Assessment letter in the post — a new system rolled out from October 2025 that tells you what you owe and how to pay, without you ever filing a return. This guide explains how the PSA works in 2025/26, how it stacks with the often-forgotten £5,000 Starting Rate for Savings, when an ISA wins, and the legal moves to keep your interest tax-free.
The Personal Savings Allowance in 2025/26
The PSA was introduced in April 2016. It works as a 0% nil-rate band — savings interest still counts toward your tax band, but a slice of it is charged at 0%.
| Your tax band | Personal Savings Allowance | Equivalent tax-free savings at 4% | Equivalent at 5% |
|---|---|---|---|
| Non-taxpayer (income below £12,570) | n/a (use starting rate) | see below | see below |
| Basic rate (20%) | £1,000 | £25,000 | £20,000 |
| Higher rate (40%) | £500 | £12,500 | £10,000 |
| Additional rate (45%) | £0 | nil — ISA only | nil — ISA only |
The PSA covers interest from UK banks, building societies, credit unions, corporate and government bonds (including gilt coupons), interest distributions from authorised unit trusts and OEICs, and certain life-annuity income. It does not cover dividends (separate £500 allowance), Premium Bond winnings (always tax-free) or any interest earned inside an ISA (always tax-free).
The forgotten £5,000 Starting Rate for Savings
Below the PSA sits a far more generous allowance that almost nobody talks about. The Starting Rate for Savings charges up to £5,000 of savings interest at 0% — but only if your other (non-savings) income is low enough.
- If non-savings income (salary, pension, rental income) is at or below the £12,570 personal allowance, you get the full £5,000 starting rate.
- The starting rate reduces £1 for every £1 of non-savings income above £12,570.
- At £17,570 of non-savings income, it disappears entirely.
Stacked with the £1,000 PSA, a basic-rate saver with non-savings income at the personal allowance can earn up to £18,570 tax-free — that’s roughly £450,000 in easy-access savings at 4%. The starting rate is especially powerful for pensioners on the new state pension plus modest other income, and for one half of a couple where one partner is part-time or not working.
Worked example: Margaret, retired
Margaret receives the full new state pension and a small private pension of £2,000, with £4,500 of taxable savings interest from a fixed-rate bond that matured this year.
| Step | 2025/26 (state pension £11,973) | 2026/27 (state pension £12,547.60) |
|---|---|---|
| Non-savings income | £13,973 | £14,547.60 |
| Personal allowance used | £12,570 | £12,570 |
| Non-savings income taxed at 20% | £1,403 × 20% = £280.60 | £1,977.60 × 20% = £395.52 |
| Starting rate remaining (£5,000 − non-savings excess) | £3,597 | £3,022.40 |
| Savings interest at 0% (starting rate + PSA) | £3,597 + £1,000 = £4,597 | £3,022.40 + £1,000 = £4,022.40 |
| Savings interest left to tax | £0 (interest fits within tax-free bands) | £477.60 × 20% = £95.52 |
| Total tax | £280.60 | £491.04 |
The April 2026 state pension uprating quietly raised Margaret’s bill by more than £200 — not because savings rates moved, but because more of her PA is now consumed by the state pension. With the full new state pension at £12,547.60, only £22.40 of personal allowance remains for non-savings income. The starting rate still does most of the heavy lifting.
When does an ISA start beating the PSA?
The £20,000-a-year ISA allowance shelters interest, gains and dividends entirely — and you never have to declare anything to HMRC. The rule of thumb at 2026 rates (around 4% easy-access):
- Basic-rate taxpayer: non-ISA savings over £25,000 start producing more than £1,000 of interest — switch to cash ISA.
- Higher-rate taxpayer: non-ISA savings over £12,500 exceed the £500 PSA — switch to cash ISA.
- Additional-rate taxpayer: no PSA at all — every penny outside an ISA is taxed at 45%. ISA always wins.
One change to watch: the Autumn Budget 2025 announced a cut to the cash ISA limit for under-65s, from £20,000 to £12,000 a year, effective April 2027. The overall £20,000 ISA allowance stays, but to use the full amount you’ll need to put at least £8,000 into stocks and shares, an Innovative Finance ISA or a Lifetime ISA. If you are under 65 and your savings are predominantly in cash ISAs, use the 2025/26 and 2026/27 allowances in full to bank the existing £20,000 cap before it shrinks. See our best cash ISA rates guide for current top rates.
How HMRC actually collects savings tax
Banks and building societies report your interest annually to HMRC automatically. You almost never need to declare it yourself. HMRC then does one of three things, depending on your circumstances:
- Adjusts your PAYE tax code. The default for employees and pensioners — you’ll see a smaller personal allowance on your tax code, and a few extra pounds will quietly come out of your salary each month.
- Sends a Simple Assessment letter. Rolled out from October 2025 to taxpayers without PAYE codes or with complex savings. The letter tells you the tax due and gives you 60 days to pay — no return required. Many readers will already have received one for 2024/25.
- Requires Self Assessment. Mandatory if your untaxed savings and investment income exceeds £10,000 a year.
If you’ve never paid attention to your tax code, check it now. A code lower than 1257L (£12,570 ÷ 10) probably means HMRC has already started collecting tax on your savings.
The fixed-rate bond timing trap
If your bond doesn’t let you withdraw interest before maturity, HMRC’s rule is that the interest is taxed in the year it becomes accessible — usually all in one go, when the bond matures. A £20,000 three-year bond at 4.5% pays around £2,700 of interest, and on a fixed bond without in-term access, that whole £2,700 lands in your year-three tax return. For a basic-rate taxpayer, that’s £1,700 over the PSA — £340 of tax instead of zero if the interest had been paid annually.
Two practical fixes:
- Pick bonds that pay interest annually and allow you to access it (or move it to your nominated current account) — this spreads the tax across years.
- Stagger bond maturities — keep one bond maturing each tax year rather than several in the same year.
A small number of bond providers report interest to HMRC annually even when it isn’t accessible. If that’s happened to you, the correct treatment in HMRC’s own guidance is interest in the year of access — keep records and challenge if necessary.
Joint accounts and couples
Each person has their own PSA, so couples effectively double the allowance — £2,000 between two basic-rate taxpayers, £1,000 between two higher-rate taxpayers. Joint account interest is split 50/50 by default, regardless of who actually owns the money. Married couples and civil partners can submit Form 17 to declare an unequal split — useful when one partner pays a higher rate. The form must reach HMRC within 60 days of signing and only applies from that date; you cannot backdate it.
Moving savings into the lower-earning spouse’s name is the cleanest way to halve a couple’s savings tax bill. If one spouse is a non-taxpayer, also check Marriage Allowance — worth £252 a year, plus up to £1,008 backdated.
Six legal ways to cut your savings tax bill
- Use your ISA allowance every tax year. Once savings exceed the rough tipping points above, every additional pound is better off inside an ISA.
- Move savings to the lower-earning spouse. Doubles the household PSA and may unlock the starting rate.
- Spread fixed bonds across tax years. Avoid bunching all interest into one return.
- Use Premium Bonds for sums above your PSA. Prize fund rate 4.00% in 2025, 100% tax-free, and prizes don’t count toward PSA at all. Returns are skewed by the £1 million prizes, so most savers earn less than the headline rate — but for higher- and additional-rate taxpayers who’ve already exhausted the PSA, the after-tax comparison usually favours Premium Bonds over taxable savings.
- Top up your pension. Salary sacrifice or personal contributions reduce your taxable income, potentially dropping you from higher- to basic-rate — instantly doubling your PSA.
- Plan around the 2027 cash ISA cut. Under-65s should fill the existing £20,000 cash ISA allowance in 2025/26 and 2026/27 while it’s still available.
Frequently asked questions
How much savings interest can I earn tax-free in 2026?
It depends on your tax band. Basic-rate taxpayers get a £1,000 Personal Savings Allowance; higher-rate £500; additional-rate £0. On top of that, anyone with non-savings income at or below £12,570 also gets up to £5,000 of savings interest at 0% under the Starting Rate for Savings. ISA interest is always tax-free and doesn’t use any allowance.
Do I need to declare savings interest to HMRC?
Usually no — your bank reports it automatically. HMRC will either adjust your tax code, send you a Simple Assessment letter telling you what to pay, or — if your untaxed savings and investment income exceeds £10,000 a year — require you to file a Self Assessment return.
What is a Simple Assessment letter?
It’s a tax demand HMRC sends directly to people who owe tax outside the PAYE system — most commonly because their savings interest exceeds the PSA. Rolled out from October 2025, the letter sets out the calculation, gives you 60 days to pay, and means you don’t have to file a return. If you disagree, you have 60 days to query before it becomes final.
Are Premium Bond prizes taxable?
No. Premium Bond prizes are 100% tax-free, never count toward the Personal Savings Allowance, and don’t need to appear on a tax return. The prize fund rate is 4.00% as of 2025. Note that returns are heavily skewed by the £1 million top prizes — most holders earn less than the headline rate — but for higher-rate savers who’ve used up their PSA, the after-tax comparison often favours Premium Bonds.
Is ISA interest counted in my PSA?
No. Interest, dividends and capital gains inside any ISA — cash, stocks & shares, Innovative Finance or Lifetime ISA — are tax-free and don’t use any part of your PSA. That’s why ISAs become the better home for cash once non-ISA savings exceed the tipping points (~£25,000 for basic-rate, ~£12,500 for higher-rate at 4%).
When is interest on a fixed-rate bond taxed?
HMRC’s rule is that interest is taxed in the tax year it becomes accessible — usually at maturity for fixed-rate bonds without in-term access. This often means several years of interest land in one tax year, potentially blowing through the PSA. Use bonds that pay interest annually or stagger maturity dates to avoid bunching.
Can my partner and I share our PSA?
No, the PSA is individual. But each of you has your own £1,000 or £500 allowance, so a couple can effectively double the household allowance by moving savings into the lower-rate partner’s name. Joint account interest is split 50/50 by default; married couples and civil partners can use Form 17 to declare an unequal split.
Related guides on GetSmartSaver.Uk
- Best Cash ISA Rates UK 2026
- ISA Allowance 2026 UK Guide
- Premium Bonds 2026: Are They Still Worth It After the Rate Cut?
- Marriage Allowance UK 2026
- Take-Home Pay Calculator — see how a pension contribution shifts you between tax bands
Last updated 30 May 2026. Figures verified against gov.uk, the November 2025 Autumn Budget, HMRC savings-tax receipts data, the Office for Budget Responsibility forecasts and AJ Bell’s FOI request. This article is general guidance, not personal tax advice.