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What is a personal savings allowance?

A personal savings allowance (PSA) allows people who pay basic and higher rate of income tax to have an amount of savings interest that can be kept tax-free.

How does the personal savings allowance work?

How does the personal savings allowance work?

The personal savings allowance available to you is dependent on how much you earn:

  • Basic-rate taxpayers (20%) - up to £1000 of savings interest you earn is tax-free
  • Higher-rate taxpayers (40%) - up to £500 of savings interest you earn is tax-free
  • Additional-rate taxpayers (45%) - no allowance

The interest you earn on your savings will be paid gross, meaning we will not automatically deduct tax from your interest. It is your responsibility to pay any tax you may owe to HM Revenue and Customs (HMRC).

What income is covered by the personal savings allowance?

What income is covered by the personal savings allowance?

The personal savings allowance applies to savings income which includes:

  • Interest earned on Non-ISA Savings Accounts and Bank Accounts
  • Income from Corporate  Bonds and Government Bonds
  • Interest distributions from authorised unit trusts, open ended investment companies and investment trusts

Savings income from Individual Savings Accounts (ISAs) does not count towards the personal savings allowance as it is already tax-free.

To find out more about the personal savings allowance, please visit the HMRC website.

Do I still need a cash ISA account?

Do I still need a cash ISA account?

Understanding whether an ISA account is a suitable option for you depends on a number of factors, such as your income, which taxpayer band you fall into and the amount you are likely to save.

There are several reasons why an ISA might be worth considering:

  • Long term benefit - ISAs allow customers the opportunity to build and grow a tax-free savings pot year on year
  • Flexibility - With a Flexible ISA, you can take money out and replace it within the same tax year without affecting your annual allowance
  • Additional-rate tax payers - Taxpayers with earnings of over £150,000 do not get a PSA. This means they will continue to pay tax on their non-ISA-savings
  • Higher interest rates - Cash ISA accounts sometimes pay a higher rate of interest than ordinary savings accounts

To find out more about your savings options, you can book a free personal review with Halifax or visit the HMRC website for more information on tax.

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