Because of the personal savings allowance (PSA), which allows most people to earn up to £1,000 in interest without paying tax on it, less than 5% of people in the UK pay tax on their savings earnings. To surpass the allowance at current low savings rates, you’d need to have £200,000 in the top easy-access savings account! This guide contains complete information on the PSA and how it works.
What is a Personal Savings Allowance?
Your personal savings allowance (PSA) in the UK is a tax-free allowance that allows you to earn interest on your savings without having to pay tax on it. The allowance you receive is determined by the rate of income tax you pay.
- Minimum-wage (20 percent ) Taxpayers can earn up to £1,000 in savings interest per year without paying any tax.
- a higher rate (40 percent ) Taxpayers can earn up to £500 in savings interest per year without paying any tax.
- Additional-rate (45%) taxpayers: £0; they do not receive an allowance break.
According to estimates, more than 95 percent of savers do not pay any tax on their savings interest as a result of the PSA. For additional information, see the Treasury’s advice on the tax on savings interest.
The PSA will cover any interest earned on bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds, and gilts. It also covers income earned in other currencies stored in UK-based savings accounts (for example, US dollars and euros).
How Does the Personal Savings Allowance Work In the UK?
The personal savings allowance is straightforward. In the United Kingdom, there are three income tax brackets: the basic rate, the higher rate, and the supplementary rate.
- If you fall into one of the first two tax brackets, you won’t have to pay income tax on a large portion of the interest you earn.
- People on the basic rate of income tax—anyone earning up to £50,270 in 2021/23—pay no income tax on the first £1,000 in savings interest.
- Those earning between £50,271 and £150,000 in 2021/23 pay no income tax on the first £500 of interest earned.
If you earn more than £150,000 per year at an extra rate, you will not be eligible for the personal savings allowance and will have to pay income tax on all interest earned.
If you earn more interest than the personal savings allowance allows, you must pay income tax on the excess at your regular rate—either 20% or 40%, depending on the band. However, in order for this to work at the current rates of interest, you’d need to have a substantial amount of money saved up.
According to HMRC, around 95 percent of the population is either on the basic or higher rate of income tax and can benefit from the personal savings allowance.
In what circumstances does the Personal Savings Allowance apply?
The PSA applies to any interest earned in a calendar year, including interest earned from the following sources:
- Accounts at banks and building societies
- Accounts for savings and credit unions
- Unit trusts, investment trusts, and open-ended investment corporations
- Peer-to-peer lending
- Funds held in trust
- Payment security insurance (PPI)
- Government or corporate bonds
- Payments from a life annuity
- Certain life insurance policies
The only money that is already tax-free, such as interest from individual savings accounts (ISAs) or Premium Bond winners, is not covered by the personal savings allowance.
So, if you win £100 from Premium Bonds and receive £100 in ISA income, you’ll still have £1,000 in your personal savings account to cover any additional interest you may earn.
How much can I save before going over my personal savings allowance?
The type of savings account and the interest rate affect the amount you can save.
A basic-rate taxpayer, for example, would need to hold more than £100,000 in a savings account that pays 1% interest for the entire year before it earned enough interest to use up its personal savings allowance.
Before their allowance was depleted, a higher-rate taxpayer might save half that amount, or £50,000.
What is the procedure for claiming the personal savings allowance in the UK?
The good news is that you don’t have to do anything to be eligible for the allowance.
Interest is now paid directly into your account with no deductions for taxes, so it all happens automatically. If your interest income exceeds your allowance, any tax due will be paid to HM Revenue and Customs (HMRC) via your tax code.
If you file a self-assessment tax return, you will instead refund any tax payable this way.
Is there still a benefit to saving in cash ISAs?
ISAs are a form of savings account that provides a significantly larger tax-free threshold of up to £20,000, and they function similarly to the PSA.
Although a substantial amount of savings is required to exhaust your personal savings allowance, keep in mind that if interest rates begin to rise, you may need to save much less to hit the £1,000 or £500 level.
How does the income tax system work?
Income tax is a tax levied on your earnings. It is normally deducted automatically from your paycheck, but freelancers must compute it themselves.
The first £12,570 of everyone’s income is not taxed in the 2021/23 tax year – unless they earn more than £10,000.
Income tax is levied at three levels for those earning more than £12,570 per year.
- Basic rate: Anyone earning between £12,571 and £50,270 per year pays 20% income tax on anything they earn after the first £12,570.
- Higher rate: If you earn between £50,271 and £150,000, you pay 20% tax on the first £50,270 you earn, and 40% tax on the rest of your earnings up to £150,000. Unless you make more than £100,000, the first £12,570 is tax-free. If you earn more than £100,000, your tax-free allowance decreases by £1 for every £2 your salary exceeds £100,000.
- Additional rate: Those earning £150,001 or more per year pay 20% of the first £50,270, 40% of the next £100,000, and then 45% of everything they earn after that.
How much tax will you pay on your savings?
Although interest on savings, like any other income, is usually taxable, savings interest from your bank or building society is usually paid ‘gross.’ The following are the limits on the amount of interest that can be earned tax-free.
| Your tax rate | Income derived from sources other than savings, such as a salary | Amount of tax-free interest on savings |
| There is no tax. | From £0 to £12,570 | With the beginning rate for savings, you can earn up to £5,000 in tax-free interest from savings. |
| The taxpayer at the basic rate – low income | £12,571-£17,570 | With the starting rate for savings, you can earn up to £5,000 in tax-free interest. With the Personal Savings Allowance, they can also earn up to £1,000 in additional interest on their savings without having to pay tax. |
| The taxpayer at the basic rate | From £17,571 to £50,270 | With the Personal Savings Allowance, they can earn £1,000 in interest on their savings without paying tax. |
| The taxpayer at a higher rate | from £50,271 to £150,000 | With the Personal Savings Allowance, you can earn up to £500 in interest tax-free. |
| Extra-rate taxpayers | More than £150,000 | There is no savings interest allowance. |
Any savings interest that exceeds your Personal Savings Allowance or Starting Rate for Savings is taxed. Your income determines the amount of tax you must pay.
Is the personal savings allowance applicable to all savings income?
The personal savings allowance applies to any interest earned on non-ISA savings and current accounts.
There are several exclusions, such as Isas and certain NS&I savings products, such as premium bonds. They are not eligible for the personal savings allowance because they are already tax-free.
Some investments are also eligible for the personal savings allowance. You can apply your personal savings allowance to interest received from the following sources:
- Government bonds, corporate bonds,
- interest in peer-to-peer financing
- Interest distributions, also known as income from bond funds, licenced unit trusts, open-ended investment corporations, and investment trusts.
In a nutshell, the underlying investments determine whether you pay taxes on your investment income as a dividend or as savings.
Earnings from loan-based investments, such as the ones mentioned above, are taxed as interest. However, profits from equity investments (purchasing stock in a company) are taxed as dividend income.
Profit from rental properties is taxed in the same manner as income from labour or pensions.
Can savings interest put me in a higher tax bracket?
Yes, savings income within the allowance still counts towards the basic or higher-rate limitations – and may thus affect the level you’re entitled to as well as the tax rate owing on any surplus income.
So, if you are a basic-rate taxpayer and earn enough interest from savings to take you over the higher-rate tax threshold, you will only be entitled to a £500 allowance and will have to pay 40% tax on the remainder.
The higher-rate tax threshold in most of the UK will be £50,270 in 2021–2023, up from £50,000 in 2020–21.
The higher-rate threshold operates slightly differently in Scotland. In 2021-23, you pay 41 percent income tax on earnings over £43,662, up from £43,430 in 2020-21.
What happens if I go above my Personal Savings Allowance in the UK?
Using the data provided by banks and building societies, the pay-as-you-earn (PAYE) system will typically automatically collect any taxes owed. If this is the case, you should receive a ‘notice of coding.’
It can also be declared on a self-assessment tax return if you normally file one.
Interest could someday be collected straight from individual digital tax accounts as part of long-term efforts to overhaul the current tax system.
Submit your 2020-23 tax return: Calculate your bill and send your tax return directly to HMRC.
What if I paid too much tax on my interest?
If your bank or building society did not use your entire personal savings allowance, you can reclaim the tax paid on your savings interest.
Fill out Form R40 to claim the incorrectly levied tax. You can claim tax credits for savings made up to four years ago.
It usually takes six weeks to get your money back.
Personal Savings Allowance FAQs
Can HMRC check personal bank accounts?
For the time being, the answer is a qualified ‘yes.’ If HMRC is investigating a taxpayer, it has the authority to issue a ‘third party notice’ to obtain information from banks and other financial institutions. It has the authority to send these letters to taxpayers’ lawyers, accountants, and estate agents.
How far back can the taxman go?
In most circumstances, the HMRC tax inquiry time limit is four years, after which they can go back and seek money from taxpayers. HMRC can go back 6 years if someone has been sloppy (submitting tax returns with errors).
Can the government see how much money is in your bank account?
Yes, the government can examine individual personal bank accounts. Government agencies, such as the Internal Revenue Service, have access to your personal bank account. If you owe taxes to a government agency, the agency may place a lien on your property or freeze your bank account.
