How much savings interest can you earn tax-free — and are you making the most of it?

What is the Personal Savings Allowance — and how does it work?

The Personal Savings Allowance (PSA) was introduced in 2016 and allows most people in the UK to earn some savings interest completely free of income tax.

How much you can earn tax-free depends on whether you are a basic rate or higher rate taxpayer:

• Basic rate taxpayers (income up to £50,270): up to £1,000 of savings interest tax-free per year
• Higher rate taxpayers (income over £50,270): up to £500 tax-free per year
• Additional rate taxpayers (income over £125,140): no allowance at all

Banks and building societies no longer deduct tax from your interest before paying it. Instead, HMRC usually collects any tax you owe by adjusting your tax code. But they will not proactively tell you if you are entitled to more tax-free interest than you realised — that part is up to you to check.

What is the starting rate for savings — and why do so few people know about it?

Here is where things get genuinely valuable — and surprisingly little-known. There is a separate allowance called the starting rate for savings, which allows you to earn up to £5,000 of savings interest at zero per cent tax.

The key rule is that this allowance reduces by £1 for every £1 of taxable non-savings income you have above the personal allowance (currently £12,570). So it only applies if your total non-savings income — things like pension payments, wages, or rental income — is below £17,570.

If your non-savings income is £12,570 or less (meaning all of it is sheltered by your personal allowance), you keep the entire £5,000 starting rate band. Add that to your £1,000 Personal Savings Allowance, and you can earn up to £6,000 in savings interest without paying a penny in tax.

How does this affect you if you mainly live on the State Pension?

The full new State Pension in 2026/27 is £241.30 a week — which works out at approximately £12,548 a year. This is just below the personal allowance of £12,570.

That means if the State Pension is your only income, you have virtually no taxable non-savings income at all. The entire £5,000 starting rate band is therefore available to you.

In practice, that gives you:

• £5,000 from the starting rate for savings (at 0% tax)
• £1,000 from the Personal Savings Allowance
• Total: up to £6,000 in savings interest per year, completely tax-free

To put that into context: at a savings rate of 4.5%, you would need around £133,000 in savings before you started paying any tax on the interest at all. Many people in this situation have been paying tax they did not actually owe.

What if you have a private pension or other income as well?

Things become more nuanced if you receive income from a private or workplace pension on top of the State Pension. As your non-savings income rises above £12,570, the starting rate band is reduced pound for pound.

• If your total non-savings income is £14,570, your starting rate band shrinks to £3,000
• If it reaches £17,570 or more, you lose the starting rate band entirely
• But you will still keep your £1,000 Personal Savings Allowance, provided you remain a basic rate taxpayer

Many people receiving a modest occupational pension alongside the State Pension will still have some starting rate band left. It is worth working out exactly where you stand — the difference between paying tax and not paying tax on your savings could easily run to several hundred pounds a year.

Could you be owed a refund if you have already paid tax on your savings?

HMRC do not automatically check whether you have been using the starting rate for savings. If tax has been collected on your savings interest — perhaps through an adjusted tax code — and you were actually entitled to the starting rate, you may be owed a refund for up to four previous tax years.

You can check your position and make a claim through your HMRC Personal Tax Account online at gov.uk, or by calling HMRC on 0300 200 3300 and asking specifically about your savings income and the starting rate band. It is simpler than it sounds, and the outcome can be a pleasantly unexpected cheque.

Are ISAs still worth using — even with these allowances available?

Yes — and they complement these allowances rather than replacing them. Interest earned inside an ISA does not count toward your Personal Savings Allowance or starting rate band at all. It is simply tax-free, full stop, regardless of how much you earn or what other income you have.

The annual ISA allowance in 2026/27 remains £20,000 per person. If you have substantial savings, gradually moving money into a Cash ISA each year shelters more of your interest from tax permanently — and future-proofs you against any changes to the PSA or starting rate rules.

A few practical points worth knowing:

• You can hold multiple ISAs simultaneously — for example a Cash ISA and a Stocks and Shares ISA — as long as combined deposits in any one tax year stay within £20,000
• Flexible ISAs let you withdraw and replace money within the same tax year without losing your allowance — ideal if you need occasional access to funds
• Your ISA passes on tax-efficiently: a spouse or civil partner can inherit your ISA and maintain its tax-free status through what is called an Additional Permitted Subscription

What about Premium Bonds — do they count toward any of these limits?

No — Premium Bond prizes are completely tax-free and do not use up any of your Personal Savings Allowance or starting rate band. NS&I allows you to hold up to £50,000 in Premium Bonds per person. They are technically a prize draw rather than savings interest, which means they sit entirely outside the tax system. For people who have already used their other allowances, Premium Bonds can be a useful home for additional savings.