Tax and your Personal Savings Allowance
Unlock your financial potential with our simple Personal Savings Allowance guide.
In this guide
Personal Savings Allowance (PSAs) can feel like a maze - but we're here to guide you through it. In this guide, you'll discover:
- What is a Personal Savings Allowance?
- How your Personal Savings Allowance works
- What you Personal Savings Allowance includes
The basics about savings and tax
Depending on your income tax band, you could earn up to £1,000 in tax-free interest each tax year using your Personal Savings Allowance (PSA).
Don't forget, it's a legal requirement to pay tax on any interest earned over and above your Personal Savings Allowance.
What is a Personal Savings Allowance?
Set by the government, your Personal Savings Allowance is the amount of interest you can earn on your non-ISA savings before UK income tax applies.
It depends on your annual income, which can include earnings from work, benefits and pensions, investments and savings.
The Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 interest on their non-ISA savings each tax year without paying any UK income tax on it.
Higher rate taxpayers have a PSA of £500 before they pay UK income tax while additional rate taxpayers don’t qualify for the PSA.
How your Personal Savings Allowance works
The amount of interest you can earn on your savings will depend on your tax bracket:
- Basic-rate taxpayers (20%) – tax-free interest up to £1,000.
- Higher-rate taxpayers (40%) – tax-free interest up to £500.
- Additional-rate taxpayers (45% or higher) – no tax-free interest on savings.
If your income is below £17,570, you may benefit from the starting rate for savings. For the current tax year, that’s up to £5,000 in tax-free interest. The £5,000 reduces by every £1 of other income, above your Personal Allowance.
If you earn between £12,571 and £17,570, you may qualify for both the starting rate for savings, in addition to your Personal Savings Allowance.
What your Personal Savings Allowance includes
Your PSA covers a range of saving types, including:
- 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.
Visit gov pages on tax on savings interest
Whether or not you benefit from a PSA, you may be interested in saving products which help you to earn tax-free interest as standard. Separate to your PSA, is your ISA subscription limit – in the current tax year, this allows you to save and earn tax-free interest on up to £20,000.
Exceeding your Personal Savings 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 – i.e. you don’t just report the bit above the allowances, you report all of it.
Paying tax on savings interest
Banks and other financial institutions report all interest to HM Revenue & Customs (HMRC) at the end of each tax year. If you’re employed, or you receive a pension, HMRC may change your tax code. This means if you need to pay tax on interest you’ve received, this will happen automatically.
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 think you’ve overpaid, you can reclaim tax on your self-assessment, or by completing an R40 form – available from the gov.uk website.
Interest earned from money held in ISAs are an exception. These are free from Income Tax in the UK.
Explore your options
Whatever you’re saving for, a Lloyds ISA or savings account could help.
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