Your allowance — and why ISAs never count
There are three layers of tax-free savings interest, and most people are covered by them without doing anything:
| Your tax band | Tax-free savings interest a year |
|---|
| Basic-rate taxpayer (20%) | £1,000 Personal Savings Allowance |
| Higher-rate taxpayer (40%) | £500 Personal Savings Allowance |
| Additional-rate taxpayer (45%) | £0 — no allowance |
| Low non-savings income | Up to £5,000 extra under the starting rate for savings |
| Money held in an ISA | Always tax-free — doesn’t use any allowance |
The starting rate for savings helps people whose other (non-savings) income is low: you can earn up to £5,000 of savings interest tax-free on top of the Personal Savings Allowance, but the £5,000 is reduced £1 for every £1 your non-savings income is above your personal allowance — so it mostly helps pensioners and low earners. Premium Bond prizes are tax-free too, and don’t use your allowance.
The reassuring bit
To use up a £1,000 allowance at, say, a 4.5% rate you’d need roughly £22,000 sitting in ordinary (non-ISA) savings. Most people’s everyday savings stay well inside the allowance — so for the majority, savings interest is simply tax-free and there is nothing to do.
Going over — the frozen-allowance trap
You only pay tax on interest above your allowances, and it’s charged at your normal income tax rate (20%, 40% or 45%). The reason this now catches people it never used to:
- The Personal Savings Allowance has been £1,000 / £500 / £0 for years — it hasn’t risen with inflation.
- Savings rates rose sharply, so the same pot of savings now throws off far more interest.
- If your pay rises into the higher-rate band, your allowance halves from £1,000 to £500 at the same time — a double hit.
Check if you’ve tipped over
Add up the interest from all your non-ISA savings accounts across the tax year (your bank’s annual interest statement or app shows it). Compare it to your allowance. If you’re close to or over, the interest above the allowance is taxable — and HMRC may already be collecting it without you noticing (see below).
How HMRC takes it — usually through your tax code
You generally don’t have to declare savings interest yourself:
- Banks and building societies report your interest to HMRC automatically after the end of the tax year.
- If you don’t do a tax return, HMRC then usually changes your tax code so the tax on any interest over your allowance is collected gradually from your wages or pension.
- If you complete a Self Assessment return, you include the interest there instead — see our Self Assessment guide.
- ISA interest is never reported because it’s tax-free — which is the whole point of an ISA.
How to keep more of it
The simplest legal way to protect savings interest once you’re near your allowance is to hold savings in a
cash ISA (up to £20,000 a year across all ISAs) — the interest is tax-free for life and never touches the Personal Savings Allowance. A
Lifetime ISA or
Help to Save can suit specific goals too.
Do this now
Open your bank app and find your total savings interest for the year (it’s usually under statements or a tax-year summary). Compare it to your allowance — £1,000 basic-rate, £500 higher-rate.
Over it, or close? Consider moving savings into a cash ISA before the interest builds further, and check your tax code on the free HMRC app or Personal Tax Account so you can see if savings tax is already being collected — and challenge it if it looks wrong.
Not financial advice
SortedUK is not a regulated financial adviser. This is general information about how the tax works. For free, impartial guidance on your own situation, use the government-backed
MoneyHelper service, and confirm current rates and your own tax position on GOV.UK before acting.