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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.
The amount of interest you can earn on your savings will depend on your tax bracket:
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.
Your PSA covers a range of saving types, including:
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.
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.
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.
Whatever you’re saving for, a Lloyds ISA or savings account could help.
Weigh up your saving and investment options to find a combination that works for you.