Tax on interest
Personal Savings Allowance: £1,000, £500 or nothing
Enter your income before tax and the rate your savings pay. The tool finds which allowance the law gives you once your interest is counted, and the balance that stays clear of tax.
Your Personal Savings Allowance and what it covers
Personal Savings Allowance
£500
| Interest you can earn tax free in all | £500 |
| Balance that earns it at 4.00 % | £12,500 |
| Starting rate left | £0 |
| Your band once interest is added | higher rate |
The allowance is £1,000, £500 or nil depending on the highest band your total income reaches, interest included.
The Personal Savings Allowance lets a saver receive some interest at a 0 % rate on top of any Personal Allowance and starting rate left. Its size depends on the highest income tax band you reach: £1,000 if you stay within the basic rate band, £500 if any of your income is taxed at the higher rate, and £0 once your taxable income goes past the additional rate threshold of £125,140. The figures are written into section 12B of the Income Tax Act 2007 and are the same in 2026/27 and 2027/28. The test counts interest as part of your income, so the allowance can halve because of the interest itself. With a full Personal Allowance the higher rate starts above £50,270: someone on £49,000 of salary with £1,000 of interest pays £0.00 on it, while £500 more salary gives a bill of £146.00 on the same interest. The allowance is applied automatically; nothing has to be claimed.
Sums checked by Radif Partners · Editorial policy · How the sums are done
A band test that includes the interest
Section 12B of the Income Tax Act 2007 does not look at your salary alone. It asks whether any of your income, savings included, is charged at the higher or additional rate. That makes the allowance different from most reliefs: it is decided after the interest has been added, not before. Wages, pensions, rental profit and interest are stacked together, the Personal Allowance is taken off, and the result is compared with the £37,700 basic rate band. For someone with the standard allowance of £12,570, that places the line at £50,270 of total income.
The interest covered by the allowance is taxed at the savings nil rate under section 12A (Income Tax Act 2007, section 12A), but it still fills band space. That detail produces the cliff shown below.
| Salary | Total with interest | Band reached | Allowance | Tax on the interest |
|---|---|---|---|---|
| £45,000 | £46,000 | basic | £1,000 | £0.00 |
| £48,500 | £49,500 | basic | £1,000 | £0.00 |
| £49,000 | £50,000 | basic | £1,000 | £0.00 |
| £49,270 | £50,270 | basic | £1,000 | £0.00 |
| £49,500 | £50,500 | higher | £500 | £146.00 |
| £50,000 | £51,000 | higher | £500 | £200.00 |
| £52,000 | £53,000 | higher | £500 | £200.00 |
Up to a total of £50,270, the full £1,000 covers the interest and nothing is due. Once the total passes that point by even a pound, the allowance falls to £500. The other half of the interest is then taxed: first at 20 % for whatever basic rate band is left, then at 40 %. So a small pay rise can add more to the tax on interest than to the tax on the pay itself.
How much balance each allowance shelters
Read the other way round, the allowance sets a ceiling on how much cash can sit in taxable accounts before tax appears. On a £40,000 salary the tool finds £1,000 of tax-free interest, which at 4 % corresponds to a balance of about £25,000. On £70,000 it is £500, or about £12,500 at the same rate. At the additional rate there is no allowance at all and every pound of interest is taxed, which is also where the Personal Allowance has gone (see the page on income above £100,000).
When rates fall, the same allowance covers a larger balance; when they rise, a balance that was tax free can start to create a bill without the saver adding a penny. This is how savers who have never paid tax on interest can find a calculation from HMRC arriving after a year of higher rates.
Where the allowance sits in the order
The allowance is the third layer, after any Personal Allowance left over and the £5,000 starting rate for savings. Most employees have no Personal Allowance or starting rate left, so for them the Personal Savings Allowance is the only relief that matters. Pensioners and low earners may never reach it, because the earlier layers absorb their interest first. GOV.UK sets out the three amounts by band on its page on tax-free savings interest, and the main bands are listed on the Income Tax rates page.
Couples and joint accounts
Each person has an allowance of their own, set by their own band. A couple where one partner is a basic rate taxpayer and the other a higher rate taxpayer therefore has £1,500 of combined allowance, not £2,000. Interest on a joint account is shared between the holders, and each half is tested against its holder's allowance: the joint account page shows the split.