Find out how the Personal Savings Allowance affects the way you receive interest on your savings
What is the Personal Savings Allowance?
Depending on your tax bracket, your Personal Savings Allowance allows you to save up to £1,000 a year in tax-free interest. It’s not to be confused with your Personal Allowance, which is the amount of tax-free income you can receive each year.
What is the benefit of a Personal Savings Allowance?
The Personal Savings Allowance was introduced in April 2016, and consequently, many UK taxpayers no longer pay tax on their annual savings. Previously, banks and building societies could deduct tax from your savings account interest. What’s more, if you qualified for tax-free interest, you had to inform your bank or building society of this . So, in principle, this tax-free savings allowance is a useful tool in your savings armoury (source: Gov.UK) .
How the Personal Savings Allowance works
If you’re a basic rate taxpayer you can earn up to £1,000 a year in interest without having to pay any tax, or £500 if you’re a higher rate taxpayer. Additional rate tax payers don’t receive any allowance at all.
But how is your savings allowance income defined? Your ‘savings income’ includes account interest from the following:
Bank and building society accounts
Accounts with credit unions or National Savings and Investments
Annuity payments you’ve purchased
Government or company bond income
Interest distributions from authorised units, but not dividends.
As we will explore, your cash ISA interest does not count towards your Personal Savings Allowance, as these savings are already tax-free.
Basic rate tax payer (20%)
You keep £1,160 of interest earned
£40 paid in tax
Higher rate tax payer (40%)
You keep £920 of interest earned
£280 paid in tax
Please note these are only examples and you should refer to HMRC if you are unsure of your personal tax position. You can visit the HMRC website to find out more.
How does the Personal Savings Allowance affect me?
The table below shows how the Personal Savings Allowance affects your savings potential:
Your tax bracket
Personal Savings Allowance
Basic rate (20%)
Up to £1,000
Higher rate (40%)
Up to £500
Additional rate (45%)
Frequently Asked Questions
What about any tax due on interest above my allowance?
If the interest you earn in a year is more than your Personal Savings Allowance on all non-ISA accounts, you need to pay tax owed to the HMRC. You can get information on how to pay any tax due directly from HMRC. Visit the HMRC website or call 0300 200 3300 for more information. It is your responsibility to pay this tax.
Whether you need to pay tax is dependent on your own personal circumstances and so may be subject to change in the future.
How does the Personal Savings Allowance affect ISAs?
ISAs are tax-free savings accounts, so the interest earned in an ISA doesn't count towards your Personal Savings Allowance.
How is interest paid on my savings?
All savings accounts (from every bank and building society) pay gross interest.
If you’re still not sure how the Personal Savings Allowance will affect you and any savings accounts you have, you can come into a branch for a savings review. This will ensure that you have the right account for whatever you’re saving for.
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