Personal Savings Allowance [3 min read]
What is a Personal Savings Allowance (PSA)?
From April 2016 up to £1,000 of income from savings, (e.g. any interest earned on bank or building society accounts), will be tax-free for basic taxpayers and up to £500 of savings income will be tax-free for higher rate taxpayers. So, if your savings income is below this allowance you won’t have to pay any tax on it! If the interest you earn is above this, the tax you owe will be paid to HMRC through your tax code. You’ll get this allowance each tax year, which runs from April 6th to April 5th the year after.
From April 2019, anyone earning under £50,000 is a basic rate taxpayer (ie they only pay 20% on income between £12,501 to £50,000, as the first £12,500 is tax free). You are a higher rate tax payer if you earn more than this and your tax rate increases to 40% for earnings between £50,001 to £150,000 and 45% for earnings over £150,000.
Does the PSA apply only to savings accounts?
No, you also benefit from the allowance for interest earned in your current account or credit union account. Interest which is already tax-free isn’t covered by the PSA, like from individual savings accounts (ISAs) or Premium Bond winnings. So, interest from these will still be paid tax-free, but it won't count toward your PSA limit.
For example, if you get £500 in ISA interest and you're a basic-rate taxpayer, you'll still have £1,000 of PSA to cover other interest.
How much can I save before I go over the allowance?
This depends on which account you save into and how much interest it pays. For example, if you save into an easy access account paying around 1.5%, and you’re a basic rate taxpayer, you’d need to have more than £66,000 in your account before you’d have enough interest to use up your allowance. As a higher rate taxpayer you’d need to save £33,000 before your allowance is used.
You earn £20,000 a year and get £250 in account interest – you won’t pay tax as it’s less than your £1,000 allowance.
You earn £20,000 a year and get £1,500 in account interest – you won’t pay tax on your interest up to £1,000. But you’ll need to pay basic rate tax (20%) on the £500 above this, so after tax your account interest comes to £1,400 (£1,000 + £500 x (1 - 20%)).
You earn £60,000 a year and get £250 in account interest – you won’t pay any tax because it’s less than your £500 allowance.
You earn £60,000 a year and get £1,100 in account interest – you won’t pay tax on your interest up to £500. But you’ll need to pay higher rate tax (40%) on the £600 above this, so after tax your account interest comes to £860 (£500 + £600 x (1 - 40%)).
Do I get an extra tax break if I’m a low earner?
If you’re on a low income, an extra tax break means you may pay either no or less tax on your savings. This ‘starting rate for savings’ means anyone with a total taxable income under their personal income tax allowance plus £5,000 (ie as of April 2019 £17,500) will not pay any tax on their savings.
It’s easier to understand this by thinking of these allowances together. First, the personal allowance of £12,500, then the £5,000 starting savings rate at 0%, then the personal savings allowance that is worth up to £1,000. So, if your total taxable income is under £18,500 (your personal income allowance), you won’t pay any tax on your savings.