Listentotaxman.com UK's No.1 Independent tax website

Tax Guides

Guide to Personal Savings Allowance

Guide to Personal Savings Allowance

Author: Paul Langan

What is your Personal Savings Allowance?

Changes brought about in 2016 have meant that the majority of savers no longer pay tax on their savings. This is thanks to their 'Personal Savings Allowance'. This allowance is separate to the 'Savings Starter Rate' which is explained at the bottom of this guide.

How much is the allowance worth?

This depends on which tax bracket your earnings fall in:

  • Basic-rate taxpayers (20%) can earn £1,000 in interest from savings in a tax year before having to pay tax on it.
  • Higher-rate taxpayers (40%) can earn £500 in interest from savings in a a tax year before having to pay tax on it.
  • Additional-rate taxpayers (45%) have no allowance and must pay tax on all their savings.

*Scottish savers will have the Scottish income bands and rates applying above.

Tax is no longer deducted by the banks/ building societies from your savings.

Pensioners are subject to the same limits as everyone else when it comes to taxing their savings.

There are different rules for tax on foreign savings and children’s accounts.

How does it work?

HMRC guidance have some good examples of how the Personal Savings Allowance works:

Examples basic-rate

  • You earn £20,000 a year and get £250 in account interest. You will not pay any tax on your interest, because it’s less than your £1,000 Personal Savings Allowance.
  • You earn £20,000 a year and get £1,500 in account interest. You will not pay tax on your interest up to £1,000. But you’ll need to pay basic rate tax (20%) on the £500 interest over your Personal Savings Allowance.

Examples: higher rate

  • You earn £60,000 a year and get £250 in account interest. You will not pay any tax on your interest, because it’s less than your £500 Personal Savings Allowance.
  • You earn £60,000 a year and get £1,100 in account interest. You will not pay tax on your interest up to £500. But you’ll need to pay higher rate tax (40%) on the £600 interest over your Personal Savings Allowance.

You earn £20,000 a year and get £250 in account interest – you won’t pay any tax because 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. 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.

How much can I save before I have to pay any tax?

That would depend on the rate of interest you are earning on your savings. Take the following examples:

  20% Tax Payer 40% Tax Payer
Average easy access account 0.6% AER  £165,000 £83,500
Average fixed 2 year account 2% AER £100,000 £50,000

What income counts as savings income?

Any interest you earn from the following count as savings income:

  • bank accounts & savings accounts
  • credit union accounts & building societies.

It also includes:

  • interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
  • income from government or company bonds
  • most types of purchased life annuity payments
  • peer to peer lending

What savings income does not count?

Any savings products which are "tax-free" do not count towards your Personal Savings Allowance. These include:

  • Interest from Individual Savings Accounts (ISAs)
  • Interest from NS&I tax-free products (Savings Certificates and prizes won from Premium Bonds)

Can my savings push me into a higher tax bracket?

Yes. If your income from PAYE earnings, that is your wages from work, have you hovering close to the threshold between the basic and the higher rate (£50,270 per year for 2021/22), your income from non tax-free savings, could be enough to push you into the next bracket. In that case you would only get £500 interest from your savings tax free, rather than £1,000.

Income from ISA's and other tax-free products will not change your tax bracket.

How do I pay the tax on savings, if I owe it?

Your bank/building society/ credit union will not collect this tax. They will pay you the interest on your savings without taxing it. They will provide this information to HMRC.

HMRC will collect tax owing through changes to your tax code, based on the information supplied by the institution you have your savings with. This means that your personal tax free allowance will be reduced by the amount of tax you owe on your savings. This is another reason to make sure you are on the correct tax code.

For those who complete a Self-assessment form, you will account for this income from savings in your annual return and pay the tax due on submitting your return.

What if I already paid tax on my savings?

You can reclaim tax paid on your savings interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year.

You can claim through your Self-Assessment Tax Return if you complete one. If not, fill in form R40 and send it to HMRC. It normally takes 6 weeks to get the tax back.

What is the Savings Starter Rate?

The Savings Starter Rate is an additional tax-free savings incentive for those on low incomes. It means that those whose total taxable income is below their Personal Income Tax Allowance (£12,500 for 2020/21), won't owe any tax on interest from savings, up to £5,000. This rate is in addition to the Personal Savings Allowance detailed above.

For those with a total annual income of £12,570 or less, they can earn £6,000 in interest from savings, tax free in a year (£5,000 from the Savings Starter Rate and £1,000 from the Personal Savings Allowance).

430