What is my personal savings allowance?

What is my personal savings allowance? 

If you have a savings account you will most likely earn interest.  If you have a savings account you will automatically have a personal savings allowance (PSA). 

 

Your PSA is the amount of money you can earn in interest without having to pay tax on it. Any interest you earn that is more than your PSA will be taxed.  

 

Savings in tax-free accounts like ISAs do not count towards your allowance. 

How does it work if I pay tax? 

Each year the UK Government sets the PSA for that financial year. Your individual allowance depends on what rate of income tax you pay.

Your income tax band	How much you can earn in interest before it’s taxed
Basic rate (20%)	£1,000
Higher rate (40%)	£500
Additional rate (45%)	£0 (No PSA)

 

John’s story 

John has a savings account with an interest rate of 3.50%. 
He wants to save £3,000 towards a family holiday over the next 12 months.   
After saving £250 each month for 12 months, he has saved £3,000 and earned £56.88 in interest. 
John is in the basic rate tax band as he earns £35,000. This means he is eligible for the full £1,000 PSA.  
As John has earned less than £1,000 in interest, he does not need to pay tax on the £56.88. 

 

Sarah’s story  

Sarah has a lump sum of £15,000 to buy her daughter’s first car.
She wants to put it into a savings account until her daughter is old enough as this way it can earn interest.
She has opened a savings account with a 3.50% interest rate. 
After saving for 12 months, Sarah had earned £525 in interest on her £15,000.  
Sarah’s income of £70,000 puts her in the higher-rate tax band. This means her PSA allowance is £500.  
As Sarah has earned £525 in interest she must pay tax on the £25. 

How does it work if I don’t pay tax, or I earn under £17,570? 

Your personal allowance is £12,570 and it is different from your personal savings allowance. This is the amount of income you can earn tax-free. If you do not use all of this in wages, pension or other income you can use the remainder to earn interest tax-free.  

 

If your income is below £17,570, you may also be entitled to a starting rate for savings. This means you may also get up to £5,000 in interest without having to pay tax on it, as well as your PSA. 

 

The more you earn from other income like wages or pension, the less your starting rate for savings will be. Every £1 of income over your personal allowance reduces your starting rate of savings by £1. 

 

Alex’s Story 

Alex earns £14,000 in wages working part time. She also has a savings account which she puts money into every month. This year she has earned £200 in savings interest.  

 

Her personal allowance is used up by the first £12,570 of her wages. The remaining £1,430 of Alex’s wages reduces her starting rate of savings by £1,430. 

 

Alex’s starting rate of savings is now £3,570. Combined with her PSA of £1,000 she would have to earn more than £4,570 in interest before she owed any tax. Alex does not need to pay tax on her savings, as she’s earned £200 in interest. 

 

What counts as savings interest? 

There are multiple ways you can earn savings interest which all counts towards your PSA. These include any interest you earn from: 

• bank accounts, savings accounts, corporate bonds, government bonds and gilts 
• trust funds 
• lending money through money lending services (peer-to-peer lending) 
• unit trusts, investment trusts and open-ended investment companies 
• payment protection insurance (PPI) 
• life annuity payments and some life insurance contracts 

Any savings in tax-free accounts, like ISAs, do not count towards your allowance. 

How does a PSA work if I have a joint account? 

Usually, interest earned from a joint savings account is split equally between the account holders. The interest allocated to each individual counts towards their own PSA. 

How do I pay tax on my interest?  

How you pay tax on your interest depends on your employment and your income.  

 

Employed and/or receiving a pension 

HMRC will change your tax code, so you pay tax automatically. The amount will be based on the rate of income tax that you pay.  

 

HMRC will estimate your tax code based on how much interest you earned in the previous tax year.  

 

Non tax payer  

If you do not pay tax, your bank/building society will contact HMRC on your behalf at the end of the tax year. HMRC will then be in touch to let you know if you need to pay tax and how to pay it. 

 

The information in this guide was accurate when published.