The Personal Savings Allowance: how much interest is tax-free
Most basic-rate taxpayers can earn £1,000 of savings interest a year before any tax is due. Higher rates get less, and top earners get nothing, which changes the ISA calculation.
The Personal Savings Allowance is the reason most people with ordinary savings never see a tax bill on their interest. It quietly does a lot of work, and understanding it helps you judge when a cash ISA is genuinely worth it and when it makes little difference.
How much you get
The Personal Savings Allowance is the amount of savings interest you can earn each year before income tax is due. For 2026/27 it depends on your income tax band. Basic-rate taxpayers get £1,000 of tax-free interest. Higher-rate taxpayers get £500. Additional-rate taxpayers, those with income above £125,140, get nothing; all their savings interest is taxable.
Note how the allowance shrinks exactly as your tax rate rises, so the more you earn, the less tax-free interest you are allowed and the more valuable a tax shelter becomes.
What counts, and what does not
The allowance applies to interest from ordinary savings: bank and building society accounts, credit union accounts, and most fixed-rate savings bonds. It does not apply to interest inside an ISA, because ISA interest is already tax-free and sits entirely outside this calculation. That is an important point: money already in an ISA does not use up your Personal Savings Allowance, so the two shelters stack.
How it interacts with ISAs
Here is the practical consequence. If you are a basic-rate taxpayer with modest savings, the £1,000 allowance may already cover all the interest you earn, in which case a cash ISA saves you no tax at all and you should simply chase the best rate. The cash ISA earns its keep when your interest is likely to exceed the allowance, which happens with larger balances, or when you are a higher-rate taxpayer with only £500 of allowance, or an additional-rate taxpayer with none.
Rising interest rates matter here too. When savings rates are higher, a given balance produces more interest, so more people breach their allowance without realising, and the ISA case strengthens.
How the tax is collected and what to check
If you do owe tax on savings interest, HMRC usually collects it automatically, often by adjusting your tax code, because banks report the interest they pay you. You do not normally need to do anything, but it is worth checking your tax code is right, because an error can mean paying too much. The allowances above are for 2026/27 and can change, so confirm the current figures on GOV.UK, and do the simple sum of your likely interest against your allowance before deciding whether an ISA is worth the move.