Understanding the UK Personal Savings Allowance

The Personal Savings Allowance (PSA) allows UK taxpayers to earn a certain amount of savings income each tax year without paying tax on it. The amount you can earn tax-free depends on your income tax band.

Personal Savings Allowance Rates for 2023-24

• Basic Rate Taxpayers (20%): £1,000

• Higher Rate Taxpayers (40%): £500

• Additional Rate Taxpayers (45%): £0

 

Note: The 2023-24 tax year runs from 6 April 2023 to 5 April 2024.

Example:

For the 2023-24 tax year, if you earn £45,000 from employment and £1,000 in interest from savings, your total taxable income is £46,000. As a basic rate taxpayer, you can use your £1,000 personal savings allowance to make this savings income tax-free. Your income tax would be calculated as follows:

• Employment Income: £45,000

• Interest Income: £1,000

• Total Taxable Income: £46,000

• Less: Personal Allowance: £(12,570)

• Less: Personal Savings Allowance: £(1,000)

• Adjusted Taxable Income: £32,430

• Income Tax Payable at 20%: £6,486

 

What Counts Towards the Personal Savings Allowance?

The PSA applies to interest income from:

• Bank and building society accounts

• Savings and credit union accounts

• Unit trusts, investment trusts, and open-ended investment companies

• Peer-to-peer lending

• Trust funds

• Payment protection insurance (PPI)

• Government or company bonds

• Life annuity payments

• Some life insurance contracts

Note: ISAs and NS&I products are tax-free and do not count towards the personal savings allowance.

 

Did You Know?
The PSA can be used alongside the personal allowance and the starting rate for savings, along with tax-free savings accounts like ISAs. The personal allowance applies to all types of taxable income, while the PSA only applies to interest on savings and investments.

What Happens If You Exceed the Personal Savings Allowance?

If you earn more than your PSA, you will pay income tax on the interest income that exceeds the allowance. The tax rate depends on your total taxable income.

 

Example:

For the 2023-24 tax year, if you earn £45,000 from employment and £3,000 from savings, and you are a basic rate taxpayer:

• Employment Income: £45,000

• Interest Income: £3,000

• Total Taxable Income: £48,000

• Less: Personal Allowance: £(12,570)

• Less: Personal Savings Allowance: £(1,000)

• Adjusted Taxable Income: £34,430

• Income Tax Payable at 20%: £6,886

 

Did You Know?
Interest income can push you into a higher tax band, affecting your personal savings allowance. For instance, if your gross salary were £48,000, your total taxable income would be £51,000, reducing your PSA from £1,000 to £500 due to becoming a higher-rate taxpayer.

How to Claim the Personal Savings Allowance

If you file a tax return, declare your interest income in the main section of your return. HMRC will apply the PSA when calculating your tax bill.

For those who are employed, HMRC can adjust your tax code to ensure the correct amount of tax is deducted automatically through your payslip.

 

Do Banks Report Savings Interest to HMRC?

Yes, banks report savings interest to HMRC if you don’t fill out a tax return. HMRC will then contact you to collect any tax due.

Summary of UK Savings Tax Allowances

• Taxable Income up to £12,570: Entitled to the starting rate for savings of £5,000 tax-free interest income.

• Taxable Income from £12,571 to £17,570: Starting rate for savings tapered for earnings up to £17,570 and £1,000 personal savings allowance.

• Taxable Income from £17,571 to £50,270: £1,000 personal savings allowance.

• Taxable Income from £50,271 to £150,000: £500 personal savings allowance.

• Taxable Income over £150,000: No entitlement to the starting rate for savings or personal savings allowance.

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