What’s the Personal Savings Allowance?
Learn more about how the majority of UK savers can benefit from the Personal Savings Allowance.
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How Interest Rates Could Impact Your Tax Bill
February 17, 2026
Interest rates have the potential to fluctuate significantly, with higher rates seeing savers enjoy greater returns, but also pushing more people in to paying tax on their savings.
Whether interest rates are climbing or declining, it’s crucial to understand how these changes can impact your savings. The good news is that there are simple ways to help reduce the tax on our savings, such as saving in cash ISAs and understanding our Personal Savings Allowance (PSA).
The Personal Savings Allowance remains unchanged amid a shifting savings environment
As a quick reminder, the Personal Savings Allowance is the amount of interest an individual can earn on their savings before they need to begin paying tax. It is based on the amount of income tax we pay.
People who are basic rate taxpayers – i.e., those who pay 20% income tax – can earn £1,000 a year in savings interest before paying tax on their savings.
Rules around the Personal Savings Allowance have remained stable ever since it was announced in 2016. At this time, the UK government estimated that around 95% of UK savers would no longer have to pay tax on savings income. When interest rates are higher it could mean paying tax on your savings income for the first time.
The table below shows how increases in interest rate can significantly change the maximum amount of savings you can have before any interest earned exceeds your Personal Savings Allowance:
| Savings interest rate (AER)(1) |
Savings Balance Before Paying Tax | |
| Basic rate taxpayer | Higher rate taxpayer |
|
|---|---|---|
| 1% | £100,000 | £50,000 |
| 2% | £50,000 | £25,000 |
| 3% | £33,333 | £16,667 |
| 4% | £25,000 | £12,500 |
| 5% | £20,000 | £10,000 |
| Savings interest rate (AER)(1) |
Savings Balance Before Paying Tax | |
| Basic rate taxpayer | Higher rate taxpayer |
|
|---|---|---|
| 1% | £100,000 | £50,000 |
| 2% | £50,000 | £25,000 |
| 3% | £33,333 | £16,667 |
| 4% | £25,000 | £12,500 |
| 5% | £20,000 | £10,000 |
(1) AER stands for Annual Equivalent Rate and illustrates what your rate would be if interest was paid and compounded once each year.
For example, if you were a higher rate taxpayer receiving a 1% interest rate, you wouldn’t begin paying tax until your savings balance had passed £50,000. However, if the interest rate rose to 2%, you would begin paying tax at £25,000.
When interest rates are low, it might seem like investing in an ISA is unnecessary as your savings income doesn’t exceed your Personal Savings Allowance. However, as interest rates can change over time, you might end up regretting not making the most of your ISA allowance each year.
Find out more about your Personal Savings allowance.
Changes in circumstances can tip you towards tax
A new job or promotion at work is always cause for celebration, but one consideration is the impact on your savings. A shift in income can push you in to a higher tax bracket, which, in turn, will impact your Personal Savings Allowance and further tax on your savings.
Bonuses and one-off payments can have an impact on your Personal Savings Allowance as well, so it’s important to review your plans any time you have a change in income.
Is it time for you to make the most of a cash ISA?
One easy way to limit the tax you pay on savings is by saving in a cash ISA.
Unlike a traditional savings account, interest earned on any savings you put into cash ISAs is tax-free* – no matter how much interest you earn.
Even if you don’t currently have to pay tax on your savings – i.e., you don’t exceed your Personal Savings Allowance – by saving into a cash ISA now, you can help protect your savings from future tax.
Remember that the ISA allowance means you can only pay a limited amount into an ISA per year, so helping to future-proof your savings in an ISA now might be beneficial later.
Key things to remember:
- Cash ISAs can help protect the interest you earn on your savings from UK income tax.
- Your ISA savings interest only remains tax-free while it’s still ‘wrapped’ in an ISA account.
- The ISA allowance is the annual limit you can save in an ISA is currently £20,000. From April 2027, the government plan to change the annual cash ISA allowance from £20,000 to £12,000 for under 65s. You can find out more about the ISA changes here.
*Tax-free means the interest rate payable where interest is exempt from UK income tax. Your cash ISA savings balance will be eligible for this tax benefit for so long as it is held in a valid cash ISA account.
The tax treatment of ISAs and the applicable Government rules are subject to change. The benefits of your account for tax purposes will depend on your personal financial circumstances.
This article is for informational purposes only and is not a substitute for individualised professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs International Bank, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. This article is not a product of Goldman Sachs Global Investment Research. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
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