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What is a Personal Savings Allowance?
Your Personal Savings Allowance (PSA) is the amount of interest you can earn on non-ISA savings before tax applied, set by the government.
In this guide
PSA depends on your annual income, including earnings, benefits, pensions, investments and savings. Here you'll learn:
- How does the Personal Savings Allowance work?
- What income is covered by the Personal Savings Allowance?
- Declaring and paying tax
How does the Personal Savings Allowance work?
Your Personal Savings Allowance depends on your income and tax bracket:
- Basic-rate taxpayers (20%) - up to £1000 of earned savings interest is tax-free.
- Higher-rate taxpayers (40%) - up to £500 of earned savings interest is tax-free.
- Additional-rate taxpayers (45%+) - no Personal Savings Allowance.
If your other income is less than £17,570 per tax year, you could also benefit from the starting rate for savings. That could amount to as much as £5,000 in tax free interest over and above your PSA, but this £5,000 reduces by every £1 of other income, above your Personal Allowance.
It's your responsibility to report all income to HMRC (if required) and to pay any additional tax due on any taxable interest earned over and above your allowances.
What income is covered by the Personal Savings Allowance?
The Personal Savings Allowance applies to any savings income, which includes:
- Interest earned on non-ISA savings accounts, including banks, building society accounts and savings and credit union accounts.
- Income from corporate bonds, government bonds.
- Interest distributions from authorised unit trusts, open-ended investment companies and investment trusts.
- Other income from; peer-to-peer lending, trust funds, payment protection insurance (PPI), life annuity payments and some life insurance contracts.
Declaring and paying tax
If you complete a self-assessment tax return, you should declare all streams of income, including any interest you’ve earned from your savings.
If you’ve overpaid, you can reclaim tax in a couple of ways. You could do it on your self-assessment return, or by completing an R40 form – available at gov.uk.
Banks and other financial providers are not always required to deduct tax from any interest you earn, so it’s your responsibility to make sure you’ve paid any tax owed. What they will do though, is report any interest earned to HM Revenue & Customs (HMRC) at the end of each tax year. HMRC might use this information to change your tax code to collect any tax due throughout the year. They may adjust your tax code even if you complete a self assessment return.
Tax-efficient savings
In addition to the Personal Savings Allowance, if you’re a UK taxpayer, you can save up to the ISA subscription limit each tax year, interest on which is then free from UK income tax.
Why choose an ISA?
- Build a tax-free savings pot year after year. From buying a house, to saving for retirement, an ISA could help you to reach your savings goal.
- Some ISAs let you withdraw money when you need it. As long as you replace it within the same tax year, it might not affect your overall ISA subscription limit.
- Additional-rate taxpayers might not have a personal savings allowance but can still benefit from tax-free savings paying into an ISA each tax year.
There are several ISA types available. At Halifax, we offer both cash ISAs and stocks and shares ISAs.
The ISA you choose may depend on:
- your personal saving goals
- how flexible you need an ISA to be - you could earn more interest if you lock your money in
- how much risk you’re comfortable with, Cash ISAs offer relatively predictable returns, while stocks and shares ISA returns can go up and down over time.
Why save with Halifax?
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