what is A psa and why does it matter to me

Do you take advantage of the personal savings allowance?

If you're a basic or higher rate taxpayer, you'll have a tax-free personal savings allowance on the interest you earn on your savings and interest paying bank accounts.

What is a PSA?

In a nutshell, it allows basic rate taxpayers to earn up to £1,000 interest on their savings each year without paying any income tax on it.

Higher rate taxpayers have a PSA of £500 before they pay tax while additional rate taxpayers who earn £150,000 over the personal allowance don’t qualify.

The new allowance applies to savings kept in any bank or building society savings or current account, as well as any interest earned from credit unions, government bonds and National Savings and Investments.

What does the PSA mean for me?

Put simply, the PSA means that:

  • The first £1,000 of savings interest that basic rate taxpayers earn and the first £500 for higher rate taxpayers is free from income tax.
  • Most people no longer pay tax on their savings interest.
  • It’s your responsibility to pay any tax you may owe directly to HM Revenue & Customs, according to your individual circumstances.

Please visit www.gov.uk/hmrc/savingsallowance for more information.

The maximum you can gain thanks to the allowance is £200 if you earn £1,000 interest.

You need quite significant savings to get the full benefit of the changes, but even those with a more modest nest egg will get something back.

And of course, the more you save, the more you’ll benefit.

What about ISAs?

The PSA isn’t the only way to save tax free. Anything you put into an ISA – up to the current annual limit of £20,000 – can earn interest tax free.

Any interest earned on money in your ISA doesn’t count towards your PSA.

PSA vs ISA – which is right for me?

The PSA doesn’t replace ISAs, it just gives savers another tax-free option.

Whether you put your cash in a regular savings account or an ISA depends on your personal circumstances, but it’s important to think carefully and weigh up the best option for you and your money.

If you have a small savings pot and are likely to earn less than £1,000 in interest, you’ll just be looking for whichever account gives you the best rate, whether that’s a regular saver, current account or ISA.

If you have a larger nest egg, you may want to make use of both the PSA and the annual ISA limit.

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