What is the Personal Savings Allowance?

And what does it mean for your savings?

21 March 2023

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Introduced on 6 April 2016, the Personal Savings Allowance (PSA) allows most UK savers to earn tax-free* interest on their savings, up to certain limits each tax year (which runs 6 April to 5 April).

What is my Personal Savings Allowance?

The amount you can earn in interest each year with the Personal Savings Allowance varies depending on which Income Tax band you are in.

Income tax band	Income tax rate (England & Wales)	Personal Savings Allowance
Basic rate	20%	£1,000
Higher rate	40%	£500
Additional rate	45%	£0

Find out more about Income Tax bands
^†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) 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.

What could the impact of higher interest rates be on your Personal Savings Allowance?

When the PSA was announced in 2016, the UK government had estimated that around 95% of UK savers would no longer have to pay tax on savings income.

However, interest rates have since risen from historic lows, and while this is great news for savers, it could mean paying tax on your savings income for the first time. Find out more on why interest rates change here.

This table below shows how increases in interest rate can significantly change the amount of savings you would need to start earning more than your PSA.

Savings interest rate	Basic rate taxpayer	Higher rate taxpayer
Savings interest rate	How much can I save before I have to pay tax on my interest earned?
1%	£100,000	£50,000
2%	£50,000	£25,000
3%	£33,333	£16,667
4%	£25,000	£12,500
5%	£20,000	£10,000

For example, if you were a higher rate tax payer receiving a 1% interest rate, you wouldn’t begin paying tax until your savings balance had passed £50,000. However, if the interest rate rose to 2%, you would begin paying tax at £25,000.

When interest rates are low, it might seem like investing in an ISA is unnecessary as your savings income doesn’t exceed your Personal Savings Allowance. However, as interest rates can change over time, you might end up regretting not making the most of your ISA allowance each year.

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

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.

Can interest earned from saving change my tax band?

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.

How is savings interest paid and taxed?

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.

*Tax-free is the rate payable where interest is exempt from UK 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.