Savings Interest and Tax UK 2026/27: Personal Savings Allowance, Starting Rate and How a Possible September Hike Changes the Maths

The tax year runs from 6 April 2026 to 5 April 2027. Two allowances decide whether you owe anything, and both are unchanged from 2025/26 — which matters, because savings rates have not been.

Personal Savings Allowance (GOV.UK):

• Basic-rate taxpayers: £1,000
• Higher-rate taxpayers: £500
• Additional-rate taxpayers: £0

Starting rate for savings: up to £5,000 of interest taxed at 0%, but only if your other income (wages, pension, rental) is below £17,570. Every £1 of other income above the £12,570 personal allowance reduces it by £1.

Run your own numbers before reading on. Use our savings tax calculator — enter your balance, your rate and your tax band, and it shows exactly what HMRC would take.

Your tax band is set by your total income including the interest itself. A pay rise, a bigger pension, or a chunky interest payment can all push you over the £50,270 higher-rate threshold and cut your PSA from £1,000 to £500. That is the trap most savers discover too late.

The Bank of England has held Bank Rate at 3.75% since December 2025. The July vote was 6-3 to hold — but Megan Greene, Catherine Mann and Huw Pill voted to raise it to 4.00%, and the Bank said it stands ready to raise rates if the Iran conflict feeds through to wages and prices.

Savings rates have already repriced. The best no-bonus easy-access account pays 4.52% (cahoot), a one-year fix pays 4.85% (GB Bank) and a two-year fix pays 4.90% (Market Harborough BS). Higher rates mean more interest, and more interest means you hit the tax-free buffers sooner.

Here is the threshold at current rates:

• At 4.52% easy access, a basic-rate taxpayer breaches the £1,000 PSA at £22,124; a higher-rate taxpayer breaches the £500 PSA at £11,062.
• At 4.85% on a one-year fix, those thresholds fall to £20,619 and £10,309.

Higher-rate taxpayers feel this squeeze first — our piece on the £500 PSA trap shows how it bites with real accounts. If the September hike happens, easy-access rates drift higher and the thresholds fall further. That is the argument for using your ISA allowance now: interest inside a cash ISA never counts toward the PSA, however high rates go.

Assume 4.5% AER — a fair proxy for the best no-bonus easy-access and easy-access cash ISA rates in August 2026. The table shows annual interest and tax owed after the PSA at each marginal rate.

The pattern is the point. At £20,000, the basic-rate saver pays nothing while the higher-rate saver owes £160 — not because they earned more interest, but because their PSA is half the size. At £50,000, the additional-rate saver pays over £1,000 while the basic-rate saver pays £250.

Now look at what a cash ISA does to the same numbers. The best easy-access cash ISAs paid around 4.5% tax-free in August. The £20,000 higher-rate saver's £160 tax bill drops to £0, because ISA interest sits outside the PSA entirely. Over ten years that is roughly £1,600 saved before compounding.

On top of the PSA sits a separate £5,000 starting rate for savings, taxed at 0%. It is aimed at people whose non-savings income is low, and the mechanics catch many out.

Every £1 of other income above the £12,570 personal allowance reduces the £5,000 starting rate by £1. At £17,570 of other income it is gone entirely. The GOV.UK example uses £16,000 of wages and £200 of interest: the starting rate shrinks to £1,570, which covers the £200 interest completely.

For a retiree on a £15,000 pension, the starting rate is £2,570 (£5,000 minus £2,430 of pension above the allowance). Add the £1,000 PSA and they can earn £3,570 of interest tax-free — enough to shelter £79,000 in an account paying 4.5%.

The allowance is automatic if you are employed or receive a pension: HMRC builds it into your tax code. You do not claim it, but you must check the code is right if your circumstances change.

Banks and building societies pay interest gross and report it to HMRC at the end of the tax year. What happens next depends on your situation:

• Employed or receiving a pension: HMRC adjusts your tax code the following year, estimating your interest from the previous year. You may get a P800 letter between June and March if there is an overpayment or underpayment.
• Self Assessment: you declare the interest yourself. If your savings and investment income exceeds £10,000, you must register for Self Assessment.
• Neither: HMRC writes to you with the amount owed and how to pay.

One deadline matters. If you exceed your allowance and have heard nothing by 31 March of the following tax year, contact HMRC. Waiting invites penalties.

If you also have a mortgage, compare offsetting with taxable savings before assuming that a savings account is the only home for cash above your allowance.

Fill the ISA first. The £20,000 ISA allowance is use-it-or-lose-it each year, and interest inside is permanently tax-free under the ISA rules. With the allowance dropping to £12,000 for under-65s from April 2027, this year's £20,000 is more valuable than ever. See our Cash ISA guide for the current best rates, and our cash ISA vs savings account comparison for the after-tax maths.

Split savings between partners. A non-taxpayer can earn up to £18,570 of interest tax-free using the personal allowance, starting rate and PSA combined. Holding joint savings in the lower earner's name is a legitimate, zero-cost tax reduction — but the money genuinely has to be theirs.

Choose the right fixed bond. If you are going to breach the PSA anyway, the question is whether to lock at 4.85–4.90% now or wait for a possible hike. Our Best Savings Accounts guide and Fixed Rate Bonds guide run the numbers on both sides.

Consider Premium Bonds for surplus cash. Prizes are tax-free and do not count toward the PSA, which makes them attractive for higher and additional-rate taxpayers who have already used their ISA. The expected return is not a guaranteed rate, so treat them as a top-up, not a replacement for a cash ISA.

Check your tax code. If HMRC has overestimated your interest, you are overpaying; if it has underestimated, you are building a bill. Either way, a wrong code compounds.