The Personal Savings Allowance — How Much Interest a Trade Business Owner Can Earn Tax-Free (2026)

What Is the Personal Savings Allowance?

The Personal Savings Allowance (PSA) is the amount of interest you can earn each tax year before any income tax is due on it. It was introduced in April 2016 and the figures have not changed since. How much you get depends entirely on your highest rate of income tax:

• Basic-rate (20%) taxpayers: £1,000 of savings interest tax-free
• Higher-rate (40%) taxpayers: £500 of savings interest tax-free
• Additional-rate (45%) taxpayers: £0 — no allowance at all

Crucially, your PSA is set by your overall income tax band, not by the savings income alone. If your trade profits plus salary plus dividends push you into the higher-rate band, your PSA drops from £1,000 to £500 — even if only a small part of your income tips you over. This is why a good trading year can quietly halve your savings allowance.

Personal Savings Allowance 2026/27 — Quick Reference

*Based on the standard personal allowance of £12,570. These bands apply in England, Wales and Northern Ireland. Scotland has different income tax bands, but the PSA itself is set by reference to the UK-wide rates, so most Scottish taxpayers get the same £1,000 / £500 / £0 figures.

The £5,000 Starting Rate for Savings — The One Most People Miss

Separately from the PSA, there is a second, more generous allowance called the starting rate for savings. This lets you earn up to £5,000 of savings interest at a 0% tax rate — but only if your other (non-savings) income is low. This matters enormously for trade business owners who have a quiet year, who are just starting out, or who deliberately pay themselves a small salary from their limited company.

The catch is that the £5,000 starting rate tapers away £1-for-£1 as your non-savings income rises above your personal allowance. Non-savings income means your trade profits, salary, pension and rental income — everything except savings interest and dividends. Here is how it works:

• The full £5,000 starting rate is available if your non-savings income is at or below the personal allowance of £12,570.
• For every £1 of non-savings income above £12,570, you lose £1 of the starting rate.
• Once your non-savings income reaches £17,570 (£12,570 + £5,000), the starting rate is fully gone.

So if your non-savings income is £14,570, that is £2,000 over the personal allowance, leaving £3,000 of the starting rate band. Below £12,570, you keep the whole £5,000. This is on top of your PSA — meaning a director on a very low salary can potentially receive several thousand pounds of interest with no tax at all.

Starting Rate for Savings — How the Taper Works

The PSA column assumes you remain a basic-rate taxpayer. A director paying themselves a £12,570 salary with no other non-savings income could, in principle, receive up to £6,000 of interest tax-free (£5,000 starting rate + £1,000 PSA).

What Counts as Savings Interest?

The allowances above apply to a fairly broad category of interest income. It does not have to be from a savings account labelled as such. The following all count as taxable savings interest for PSA purposes:

• Interest from bank and building society accounts — current accounts, instant-access savings, fixed-rate bonds and notice accounts
• Interest on personal savings and on money held in your own name from the business (for example, a sole trader's business savings account)
• Interest from credit unions and National Savings & Investments (NS&I) accounts
• Interest distributions from some corporate bonds, gilts and authorised unit trusts
• Interest paid through peer-to-peer lending platforms

Note the important distinction for incorporated trades: if savings are held in a limited company account, the interest is not yours personally and does not use up your PSA. It is taxed inside the company instead — covered further down.

ISAs Sit Completely Outside All of This

Interest earned inside a Cash ISA is always tax-free, no matter how much you earn or which tax band you are in. It does not use up your PSA or your starting rate, and it does not have to be declared. The annual ISA allowance for 2026/27 is £20,000 per person.

For a trade business owner already near or over their PSA, moving savings into a Cash ISA is usually the single most effective move. The interest comes out of the taxable system entirely. If you have a spouse or civil partner, they have their own £20,000 ISA allowance too, so a couple can shelter £40,000 of new savings every tax year.

How the PSA Interacts With Your Other Allowances

It helps to picture your income being stacked in a specific order: non-savings income first (trade profits, salary), then savings interest, then dividends on top. Each layer has its own allowances:

• Personal allowance (£12,570): the first slice of total income that is tax-free. If your trade profits and salary do not use it all up, the unused part can cover savings interest before the starting rate or PSA is even needed.
• Starting rate for savings (up to £5,000 at 0%): sits above the personal allowance and tapers as described above.
• Personal Savings Allowance (£1,000 / £500 / £0): applies after the starting rate is used or lost.
• Dividend allowance (£500 for 2026/27): a completely separate allowance for dividend income — it does not reduce or share with the PSA.

For a company director taking a small salary plus dividends, this stacking is where the planning happens: a low salary can preserve part of the personal allowance and the starting rate for savings interest, while dividends use their own allowance and rates.

How HMRC Collects the Tax on Interest Over Your Allowance

You do not normally have to do anything to claim the PSA — banks and building societies pay interest gross (without deducting tax), and they report the interest they have paid you directly to HMRC after the end of each tax year. From there, HMRC works out whether you owe any tax:

• If you are employed or on PAYE through your own company, HMRC usually collects the tax by adjusting your tax code for the following year, so it comes out of your salary gradually.
• If you complete a Self Assessment return — which most sole traders and many directors do — you declare the interest on the return and the tax is calculated as part of your overall bill.

Because banks report interest automatically, there is no hiding it — if you go over your allowance, HMRC will find out. If you are within Self Assessment, you must include all taxable interest on the return even though the bank already told HMRC. Keep your interest certificates or annual statements with your records.

Company-Held Cash Is Different

If you run a limited company and the savings are held in the company's name, none of the personal allowances above apply to that interest. Instead:

• The interest is income of the company and is taxed under Corporation Tax, not your personal PSA.
• Corporation Tax for 2026/27 is 19% on profits up to £50,000 (the small profits rate), rising to 25% on profits above £250,000, with marginal relief in between.
• To get the after-tax interest into your own hands, you then have to extract it as salary or dividends — which may be taxed again personally.

This double layer is why directors with substantial company cash often weigh up whether to leave it in the company (earning interest taxed at Corporation Tax rates) or extract it into personal ISAs over several years. There is no one-size answer — it depends on your marginal rates and what you need the money for.

Worked Example 1 — Director on a Small Salary

Priya runs a small electrical contracting company through a limited company. She pays herself a salary of £12,570 (using up her personal allowance) and takes the rest of her income as dividends. She has £80,000 in a personal fixed-rate savings account paying 4.5%, earning £3,600 of interest in the year. Her dividends keep her within the basic-rate band overall.

• Non-savings income (salary): £12,570 — exactly at the personal allowance, so the full £5,000 starting rate is available.
• Her £3,600 interest is comfortably within the £5,000 starting rate band.
• Tax due on the interest: £0. She does not even need to dip into her £1,000 PSA.

Note: dividends sit on top and have their own allowance and rates, but they do not eat into the starting rate for savings, which is reserved for savings interest. The small salary is what unlocks the generous treatment here.

Worked Example 2 — Higher-Rate Sole Trader

Tom is a sole trader plumber with a strong year — trade profits of £62,000, which puts him firmly in the higher-rate (40%) band. He keeps a £40,000 tax-and-emergency fund in an instant-access account paying 4%, earning £1,600 of interest.

• His non-savings income is well above £17,570, so the starting rate for savings is £0 — none available.
• As a higher-rate taxpayer his PSA is £500, not £1,000.
• £500 of the interest is tax-free; the remaining £1,100 is taxed at 40%.
• Tax due on the interest: £1,100 × 40% = £440.

Tom declares this on his Self Assessment return and the £440 forms part of his overall bill. Had he kept that £40,000 in a Cash ISA instead, the entire £1,600 would have been tax-free and he would have saved the £440.

Practical Tips to Keep More of Your Interest

• Use your ISA allowance first. £20,000 per person each year, completely outside the PSA. For most trade owners with meaningful savings, filling the ISA before topping up taxable accounts is the simplest tax saving available.
• Spread savings between spouses. If your partner is a non-taxpayer or basic-rate taxpayer with spare allowance, holding savings in their name can use their starting rate, their PSA and their ISA allowance. Money must genuinely belong to them.
• Mind your salary level if you're a director. A lower salary can preserve part of the £5,000 starting rate for savings — though always weigh this against National Insurance, pension and the loss of other reliefs. Take advice before changing how you pay yourself.
• Time fixed-rate bond maturities. A multi-year fixed bond can pay all its interest in the year it matures, dumping a large lump into one tax year and pushing you over your allowance. Annual-interest accounts or laddering maturities spreads the interest across years.
• Keep company cash separate in your head. Company interest is taxed in the company — do not assume your personal PSA shelters it.
• Watch the band cliff edge. A good trade year that tips you from basic to higher rate doesn't just tax the extra profit — it also halves your PSA from £1,000 to £500.

The Bottom Line

Most basic-rate trade business owners can earn £1,000 of savings interest tax-free, dropping to £500 once a strong year pushes them into the higher-rate band, and nothing at all at the additional rate. Directors on a small salary can layer the £5,000 starting rate for savings on top, potentially sheltering several thousand pounds of interest. ISAs sit outside all of it. The key is knowing which band your total income lands in — because that single fact decides how much of your interest you actually keep.

This article is general information, not personal tax advice. Allowances and rates can change at fiscal events, and your own position may differ. Check the current figures on GOV.UK or speak to an accountant before acting.