Most people don’t realise ordinary savings accounts already come with a built-in tax-free allowance — separate from ISAs entirely. Understanding the Personal Savings Allowance (PSA) is the key to knowing whether you actually need a Cash ISA, or whether an ordinary account is just as good for you.
The allowance by tax band, 2026/27
- Basic-rate taxpayers: £1,000 of savings interest a year, tax-free
- Higher-rate taxpayers: £500 a year, tax-free
- Additional-rate taxpayers: £0 — no allowance at all
This applies to interest from ordinary savings accounts, current accounts, and some other interest-bearing products — not to a Cash ISA, where interest is always tax-free regardless of the PSA, and doesn’t use up any of your PSA either.
Why more people are affected than a few years ago
The PSA figures themselves haven’t changed since they were introduced in 2016. But two other things have moved considerably since then: savings rates are far higher than during the near-zero interest rate years of 2015–2021, and frozen income tax thresholds (frozen until April 2031) are pushing more people into the higher-rate band each year purely through pay rises that haven’t kept pace with inflation. The combined effect is that far more savers now earn enough interest to actually breach their PSA than did a decade ago, even without any change to their underlying savings habits.
A worked example
Say you’re a basic-rate taxpayer with £25,000 in an easy-access account paying 4% interest — that’s £1,000 of interest a year, exactly at your £1,000 PSA limit. Any additional savings interest beyond that — from other accounts, a bonus deposit, or a rate rise — starts being taxed at your marginal rate. A higher-rate taxpayer with the same £25,000 at 4% would already be £500 over their much smaller £500 PSA, with the excess taxed at 40%.
How the tax is actually collected
Since April 2016, banks and building societies pay interest without deducting tax at source — it’s paid gross. If you owe tax on interest above your PSA, HMRC usually collects it either through an adjustment to your tax code (if you’re employed and on PAYE) or via Self Assessment if you already file a return. Banks report interest paid to HMRC directly, so there’s no need to separately declare small amounts of savings interest yourself in most cases — HMRC’s systems are designed to pick this up automatically.
What counts, and what doesn’t
- Counts toward your PSA: interest from savings accounts, current accounts, some peer-to-peer lending, and most interest distributions from funds held outside an ISA or pension.
- Doesn’t count, because it’s separately tax-free: interest inside a Cash ISA, and (a separate allowance entirely) the first £5,000 of savings income for very low earners under the 0% starting rate for savings, which can apply on top of the PSA for people with low total income.
- Doesn’t count, because it’s a different type of income: dividends (which have their own £500 dividend allowance, covered in our ISA & SIPP series) and Premium Bonds prizes (which are entirely tax-free and don’t use any allowance at all, see our dedicated article).
Why this makes the ISA-vs-savings-account decision personal
If your realistic total savings interest across every account you hold sits comfortably under your PSA, the ‘tax-free’ label on a Cash ISA doesn’t actually deliver you anything extra in practice — you were never going to pay tax on that interest anyway, so you’re free to simply chase whichever account offers the best rate (see our dedicated Cash ISA vs easy-access comparison). That’s likely to be true for a while if you’re only just getting started — someone building the habit with a gradual approach like the 1% rule on a tight budget won’t have balances anywhere near the point where the allowance starts to bind. If you’re likely to exceed your PSA, a Cash ISA becomes genuinely more valuable, not just theoretically tax-efficient.
The bottom line
The Personal Savings Allowance is the single most important number for deciding whether you need a Cash ISA at all. Add up your realistic total savings interest at current rates, compare it to your allowance based on your tax band, and let that — not just habit — guide whether the ISA wrapper is actually doing anything for you.
This article is provided for general information and does not constitute tax advice. Personal Savings Allowance rules can change, and how they apply depends on your total income and tax band. If you're unsure how much tax you owe on savings interest, check gov.uk or speak to an accountant.
Sources
- GOV.UK Personal Savings Allowance guidance
- HMRC savings income tax guidance
- Fidelity International.
