What is the Personal Savings Allowance?

Are you worried you might need to pay Income Tax on your savings? Figures published in July show that as many as six million UK savers could have to pay tax on earned interest this year, almost twice the amount that had to in 2023. 

However, the Personal Savings Allowance (PSA), which was first introduced in 2016, lets individuals earn up to £1,000 a year in savings account interest without having to pay Income Tax on that money. 

Knowing all about the PSA, and how you’ll be taxed if you go over the allowance, can be a useful tool in planning your savings strategy – helping you to calculate any tax you may need to pay and work out where your money can grow best. 

Of course, if you’re working with larger sums or an unexpected windfall, it’s always a good idea to take independent financial advice, as they’ll be able to give you options on how to maximise the power of your money. 

How the PSA works 

Interest paid on savings accounts is taxable in the same way as earnings from employment or pension income, explains Martin Stanley, Chartered Financial Planner and Director at independent financial adviser Rowley Turton, and your allowance is based on your Income Tax band. 

“The PSA means you’re allowed to earn £1,000 tax-free, or £500 if your income overall makes you a higher-rate taxpayer. This is on top of any other allowances, and everybody gets it except the very highest earners,” he says.  

(The highest earners referenced are additional-rate taxpayers who have total income of over £124,140 in the 2024-25 financial year, although the brackets are different for Scotland.)

For a basic-rate (20%) taxpayer with a savings account paying 5% annual interest, the PSA would be exceeded if they had more than £20,000 on deposit.  

“However, a higher-rate taxpayer with an account paying 5% a year would only need £10,000 saved to use up their PSA,” explains Tom Minnikin, Partner at tax consultancy Forbes Dawson. 

The PSA only applies to savings income, and for most people, this just means interest on bank or building society accounts or from National Savings, Stanley adds.  

“However, some less common sources are interest are from certain unit trusts, some compensation payments and part of the income from non-pension annuities.  

“Things that don't count as savings income are wages, pension income, State Pension, dividends and rental income.” 

If you’re married or in a civil partnership and have a joint savings account, each account holder is taxed on half of the interest paid, says Iain McLeod, Head of Private Client Consultancy at wealth management company St James’s Place.  

“This is regardless of how much each party contributed to the account. You can elect for this to be changed, using a Form 17 election, so that the interest is taxable in line with each member’s contribution.” 

However, he points out any married couples who want to split interest income unevenly could, instead, set up separate accounts if they found that simpler. 

He adds: “In contrast, joint account holders who are unmarried are taxed on the interest to which they’re actually entitled, [which could be] based on their respective contributions to the account.” 

What happens if you exceed the PSA? 

Stanley explains: “Lots of people earn more interest than the £1,000 a year (or £500 for higher-rate taxpayers), and that's no problem at all.  

“The bank tells HMRC, and HMRC will [usually] deduct the tax from your other income automatically. You don't need to do anything or notify anyone.” 

HMRC will change your tax code to allow you to pay back what you owe - and uses the interest you received in the previous year to estimate how much you'll need to pay going forwards.

If the tax can’t be taken from other income – for example, if your only other source of income is the State Pension – then HMRC will contact you, setting out the tax you owe, known as a Simple Assessment tax bill.  

If you normally complete a self-assessment tax return, for example if you’re self-employed, you’ll need to report excess interest income in that way. You'll also need to fill out a self-assessment if you make more than £10,000 in savings interest and investments.

You shouldn’t need to calculate the tax you owe as HMRC will do this automatically, Stanley adds. 

“But if you want to know, you’ll just pay 20% Income Tax on anything that goes over the allowance, or 40% if you go into the higher-rate tax bracket, which is total income of over £50,271 a year for most people.” 

If you've got questions about whether you should be paying tax on interest received from savings, you can contact HMRC for clarification.

Could you benefit from other allowances? 

As well as the PSA, some people on low incomes can take advantage of an allowance known as the starting rate of savings.  

“The starting rate for savings is a 0% rate of tax, which can apply for up to £5,000 of savings income,” says MacLeod.  

“It only applies in full if your annual non-savings and non-dividend income is below £12,570 [the current personal allowance level].  

“If your non-savings and dividend income exceeds £12,570, your £5,000 allowance is reduced by the amount of the excess.” 

Stanley adds: “As an example, if you have £16,070 of pension income, then the starting rate for savings will only cover the remaining £1,500 of any interest. But remember you still also get the £1,000 or £500 Personal Savings Allowance as well.” 

A basic-rate taxpayer who has no other income could, in theory, earn up to £18,570 in interest a year completely free of tax, Minnikin explains.  

“This would involve using up their £12,570 personal allowance, £5,000 starting rate for savings allowance and £1,000 PSA,” he adds. 

What other options are there for savings? 

If savers are worried about paying tax on their savings, there are other places they can put their money to reduce the chances of breaching the PSA. 

• Making sure they use up their ISA allowance each year – currently, savers can put £20,000 in ISAs, and any interest received is free from tax. 
• Paying into a pension – savers can put up to 100% of their salary (or £60,000 each year, whichever is lower) into a private pension, although if they’re still working but have already started taking money from their pension, the maximum they may be able to pay in is £10,000.  
• If they aren’t working - or are on a low income – they can still pay in £2,880 per year, which will be worth £3,600 once tax relief has been applied. 
• Winnings from investments in Premium Bonds, the savings scheme from National Savings & Investments (NS&I), are paid tax free – however, it’s far from certain Bond holders will win anything.