What is the personal savings allowance?
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At a glance:
The Personal Savings Allowance (PSA) allows most people to earn an amount of interest without paying tax each year.
How much tax-free interest you can earn will depend on the rate of income tax you pay.
Your tax rate will depend on how much taxable income you have (this could include earnings from employment, income from savings or retirement, and other income you receive).
What is the benefit of a Personal Savings Allowance?
The Personal Savings Allowance (PSA) was introduced in April 2016. It was created to reduce how much tax UK savers would pay.
Before the PSA, tax was taken from your savings interest. After the change, most people have a set amount of interest they can earn without paying tax.
Before the PSA, tax was taken from your savings interest. After the change, most people have a set amount of interest they can earn without paying tax.
How does the Personal Savings Allowance affect me?
The amount of PSA available to you depends on the Income Tax band which applies to you, and to work out which band you fall into you should add together the taxable interest you’ve received with your other taxable income. See how this affects your PSA below:
| Your income tax band | Personal Savings Allowance |
|---|---|
| Basic rate (20%) | Up to £1,000 |
| Higher rate (40%) | Up to £500 |
| Additional rate (45%) | Zero |
If you are a Scottish taxpayer, the income tax bands which apply to some of your income (such as salaries and income from self-employment) will differ from these. The tax you pay on savings interest and your eligibility for the PSA is the same as the rest of the UK. You can find out more here: Income Tax in Scotland: Current rates - GOV.UK (www.gov.uk)
Find out more about Income Tax Bands at Income Tax rates and allowances for current and previous tax years - GOV.UK (www.gov.uk)
What counts towards your allowance?
Find out more about the interest that counts towards your allowance at Tax on savings interest: How much tax you pay - GOV.UK (www.gov.uk)
How does the Personal Savings Allowance affect ISAs?
ISAs are tax-free savings accounts. This means any interest you earn will not count towards your PSA.
PSA and ISA example
If you are a basic rate tax payer, you wouldn’t pay tax if you were to earn the following in one tax year: £1,000 interest in an ISA
£500 interest in a different savings account
This is because the interest earned in an ISA does not count towards your PSA.
What about any tax due on interest above my allowance?
Even if the interest you receive in a tax year is more than your Personal Savings Allowance, you may be able to benefit from other tax reliefs that allow you to receive some or all the interest tax-free. This will depend entirely on your personal circumstances and on the types and amount of income you have in the tax year.
One tax relief that could make interest tax free is the Personal Tax Allowance. Depending on your income it may also be possible to have up to an additional £5,000 savings interest taxed at 0% (this is called the starting rate for savings). You may be able to benefit from a combination of the Personal Tax Allowance, the PSA and starting rate for savings to make some or all of your interest tax free. Everyone’s tax position is different, income types and amounts can change from year-to-year, and the reliefs can be subject to change at any time. It’s your responsibility, not ours, to calculate and pay any tax due.
One tax relief that could make interest tax free is the Personal Tax Allowance. Depending on your income it may also be possible to have up to an additional £5,000 savings interest taxed at 0% (this is called the starting rate for savings). You may be able to benefit from a combination of the Personal Tax Allowance, the PSA and starting rate for savings to make some or all of your interest tax free. Everyone’s tax position is different, income types and amounts can change from year-to-year, and the reliefs can be subject to change at any time. It’s your responsibility, not ours, to calculate and pay any tax due.
There is other useful information that you may want to review at:
https://www.gov.uk/apply-tax-free-interest-on-savings
https://www.gov.uk/apply-tax-free-interest-on-savings
The content on this page is for reference. It is not financial advice.
For help with money issues, try MoneyHelper.
For help with money issues, try MoneyHelper.
