For the 2026/27 UK tax year, three individuals each receive £800 of savings interest during the year: one is a basic rate taxpayer, one is a higher rate taxpayer, and one is an additional rate taxpayer. Under HMRC's Personal Savings Allowance rules, which statement correctly describes how much of each person's £800 is tax-free?
- The basic rate taxpayer's £1,000 Personal Savings Allowance covers the full £800 tax-free; the higher rate taxpayer's £500 allowance covers £500 tax-free, leaving £300 taxable; the additional rate taxpayer gets no Personal Savings Allowance, so the full £800 is taxable
- All three receive the same £1,000 Personal Savings Allowance regardless of their tax band, so all £800 is tax-free for each of them
- Only the additional rate taxpayer receives a Personal Savings Allowance, because it exists specifically to offset the 45% additional rate
- The Personal Savings Allowance only applies to interest held in a Cash ISA, so none of the £800 in this scenario is covered unless it was earned in an ISA
Why A? And why not the others?
Correct answer: A. The basic rate taxpayer's £1,000 Personal Savings Allowance covers the full £800 tax-free; the higher rate taxpayer's £500 allowance covers £500 tax-free, leaving £300 taxable; the additional rate taxpayer gets no Personal Savings Allowance, so the full £800 is taxable
The Personal Savings Allowance tiers by tax band: £1,000 tax-free for basic rate taxpayers, £500 for higher rate taxpayers, and nothing for additional rate taxpayers, so the basic rate taxpayer's £800 is fully covered, the higher rate taxpayer covers £500 of their £800 leaving £300 taxable, and the additional rate taxpayer has the entire £800 taxable — precisely what the first option states. The option giving everyone the same £1,000 allowance is wrong because the allowance shrinks as tax band rises and disappears entirely for additional rate taxpayers. The option reserving the allowance for additional rate taxpayers only is wrong because it is the additional rate taxpayer who receives no allowance at all, the opposite of this claim. The option restricting the allowance to interest earned inside a Cash ISA is wrong because Cash ISA interest is already tax-free in its own right and does not use up the Personal Savings Allowance; the allowance instead applies to interest from ordinary, non-ISA savings and accounts.
Source: GOV.UK: Tax on savings interest — Personal Savings Allowance