What’s my Personal Savings Allowance?

Salting money away for the future makes sense. With a savings account you’ll get a nice bonus in the form of interest on the money you save. Unfortunately for some, you don’t get to keep all that extra cash. For most of us, the government also wants a slice, in the form of tax. How much tax you’ll pay on your interest depends on how much you earn, and your Personal Savings Allowance (PSA). 

In the past, banks and building societies would deduct interest from your savings as you earned it. But in 2016, the government introduced the PSA. This gives you an amount of interest you can get tax-free, based on how much you earn.

Your PSA changes based on your income level, and which tax band that puts you into. Basic rate taxpayers at 20% can earn up to £1000 in interest tax-free. If your income puts you into the higher rate tax bracket of 40%, your PSA drops to £500. If you’re an additional rate taxpayer at 45% you don’t qualify for a PSA.

If you’re below the income tax threshold of £12,570 for 2024/2025, you’ll get a £1000 PSA, but you could also benefit from the Starting Savings Rate. This is an extra allowance to encourage people on low incomes to save. It gives you up to £5000 tax-free added to your PSA. That means you could earn £18,570 in income and savings interest before you need to pay any tax. You can find out more about the Starting Savings Rate here.

Savings allowances and tax rates can change, so it’s always best to check what yours is before you make any decisions.

You may be getting interest on your money from lots of different places, most of this will count towards your PSA and you’ll need to work out the total you’ve earned in a tax year. These can include:

• Savings accounts
• Current accounts
• Corporate bonds and government bonds
• Peer-to-peer lending

There are some places you can make a return, where it won’t count towards your PSA, like:

• Cash and Stocks and Shares ISAs
• Prizes from Premium Bonds
• Dividends from stocks and shares – with these you’ll pay dividend tax instead  

Tax rules are subject to change and dependent on individual circumstances.

With savings rates higher than they’ve been for years, there’s every chance that the interest you earn on your savings will put you over the Personal Savings Allowance. If that happens, you’ll have to pay tax on the interest above your PSA. The amount of tax you’ll pay will depend on your Income Tax bracket.

Basic rate taxpayers

For every £1 of non-savings income you earn above your personal allowance, you lose £1 of your Starting Savings Rate. As a basic rate taxpayer, you’ll pay tax at the rate of 20% on your savings interest above your £1000 PSA. So if, after taking into account your personal allowance and Starting Savings Rate, if you earn £1500 in savings interest, £1000 is covered by your PSA and you’ll pay 20% on the £500 remaining – so £100 in tax.

Higher rate taxpayers

If your overall income puts you in the higher rate tax band, you’ll pay 40% tax on your savings interest above your £500 PSA. Here, if you earn £1500 in savings interest, £500 is covered by your PSA and you’ll pay 40% on the £1000 remaining – so £400 in tax.

Additional rate taxpayers

If you’re an additional rate taxpayer, you don’t have a PSA. All your income from savings interest is taxed at 45%. Receiving £1500 in interest with no PSA will mean a tax bill of £675.

You're taxed on savings interest in the tax year you can access it. For most easy-access accounts, that will be at the end of the tax year, as you can take your interest whenever you like. 

As you’ll struggle to beat inflation after paying tax, it can be worthwhile to find places where you won’t pay tax on your gains, like Cash ISA or a stocks and shares ISA.

There are different ways to pay the tax owing.

PAYE employees

If you work as a PAYE employee, where your tax is deducted from your pay every month, you should inform HMRC of your savings interest where it exceeds your personal savings allowance for that tax year. The extra tax owing can be deducted from your wages in the following tax year, as your tax code will change to cover the extra tax. This is only possible if the amount of tax you owe is below £3,000. 

Self-assessment tax return

You may want or need to file a self-assessment tax return, in which case, you should report your savings interest on your return. You’ll pay the extra tax on your annual bill. If you work for yourself, it’s important to keep records of your savings interest, because if you don’t report it correctly, you could face penalties and interest payments.