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 (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

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 How much can I save before I have to pay tax on my interest earned?
Basic rate taxpayer Higher rate taxpayer
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.

*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.