What is the Personal Savings Allowance?

And what does it mean for your savings?

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Introduced on 6 April 2016, the Personal Savings Allowance allows most UK savers to earn tax-free interest on their savings, up to certain limits. Read on to learn more about how savings are taxed and what that means for you. 

What you'll learn

  • If you’re a basic rate taxpayer, your receive a £1,000 Personal Savings Allowance, which means you can earn up to £1,000 in tax-free interest on your savings each year.
  • Interest earned on savings above your Personal Savings Allowance is considered taxable.
  • Interest earned on savings you have in an ISA remains tax-free for as long as you keep them in an ISA*.

When did the Personal Savings Allowance start?

The introduction of the Personal Savings Allowance in April 2016 means that basic rate UK taxpayers can earn up to £1,000 in interest each tax year without paying tax (which runs from 6 April to 5 April).

The amount you can earn in interest each year under the Personal Savings Allowance varies depending on your Income Tax band:

If you're a higher rate taxpayer your Personal Savings Allowance is £500. And if you pay tax at the additional rate, you don't receive a Personal Savings Allowance.

Scottish savers: this works differently for you.

What counts towards your Personal Savings Allowance?

The interest you earn on savings held in Individual Savings Accounts (ISAs) or certain National Savings and Investments (NS&I) products is free from tax* and doesn’t count towards your Personal Savings Allowance. Most other savings income, including interest on a savings account or current account, or on certain investments, counts towards your Personal Savings Allowance.

How were savings taxed before the Personal Savings Allowance?

Before April 2016, the savings income you earned through your bank or building society would normally have been subject to UK income tax. An amount equal to the basic tax rate (e.g. 20%) was usually automatically deducted from the interest on your savings by your bank or building society and paid to HMRC on your behalf.

Anyone who was in the higher or additional rate tax band would need to pay any extra tax they owed on their savings income (above the amount deducted by the bank or building society). For a higher rate taxpayer, this may have been done through their PAYE tax code or, like an additional rate taxpayer, through completing a self-assessment tax return. 

How are savings taxed now?

Before the introduction of the Personal Savings Allowance, the UK government had estimated that around 95% of UK savers would no longer have to pay tax on savings income once it was in place.

Your bank or building society will now pay your savings interest to you gross, without any tax deducted.

Following the end of each tax year, your bank or building society will let HMRC know how much interest you have received on your savings. This allows HMRC to work out whether any tax is due. If you go over your Personal Savings Allowance and you’re employed or receive a pension, the extra tax will usually be collected automatically. HMRC do this by adjusting your tax code accordingly.

If you currently complete a self-assessment tax return, you should report any interest you earn on there. If you’re not employed, don’t complete a self-assessment and don’t receive a pension, HMRC should contact you to tell you if you need to pay any tax.

Personal Savings Allowance for a joint account

When it comes to the Personal Savings Allowance for a joint account, interest is split equally between the account holders. So, what are the tax implications of joint accounts?

Suppose one of you is a basic rate taxpayer, and your partner pays at a higher rate. In that case, half the interest will count towards your basic rate Personal Savings Allowance (£1,000), and half towards your partner’s higher rate Personal Savings Allowance of £500. 

Interest you earn from saving can push you into higher tax bands

Interest on your bank or building society savings is classed as income for UK income tax purposes – which means the amount you earn can affect your Income Tax band. For example, if you’re usually a basic rate taxpayer and you earn £1,000 in interest from your savings during one tax year, that could push you into the higher-rate tax band, meaning that your £1,000 Personal Savings Allowance reduced to £500.

Why save in an ISA?

Investing in an ISA remains a great way to save. While your Personal Savings Allowance can allow you to earn interest each year up to a certain limit tax-free, all interest earned on savings held in an ISA is tax-free for as long as you keep them there* – and you can grow your tax-free savings pot year after year.

Read more about our Cash ISA

*Tax free is the rate payable where interest is exempt from income tax. Your savings balance will be eligible for this tax benefit for so long as it is held in a valid cash ISA account.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.

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