Personal Savings Allowance
Saving money is an essential part of financial planning, and understanding how savings
interest is taxed can help you make smarter decisions.
In the UK, a combination of allowances - the Personal Allowance, Savings Starter Rate,
and Personal Savings Allowance - help reduce or eliminate the tax you pay on savings
interest. This guide explains how these allowances work together and how you can
maximise your tax-free savings opportunities.
Good for
Tax-free savings:
Earn up to £1,000 (basic-rate) or £500 (higher-rate) in interest
tax-free each year.
Reduces tax on interest:
Saves 20% (basic-rate) or 40% (higher-rate) tax on eligible savings
interest.
Additional tax-free interest:
Earn up to £5,000 extra if your total income (excluding savings) is
under £17,570.
Things to consider
May be insufficient:
May not cover all interest earned when savings rates are high.
ISAs may be better long-term:
ISA interest is always tax-free and does not count toward the PSA.
Potential interest lost:
If savings exceeds the PSA, excess interest is taxed at your income tax
rate.
1. What are savings?
Savings refer to money you set aside from your income for future use. They are a practical
way to preserve your financial resources for planned expenses, emergencies, or specific
goals such as a holiday, a wedding, or education.
Savings are typically held in secure and easily accessible accounts, including bank and
building society savings accounts or National Savings and Investments (NS&I) accounts. These
accounts provide a safe place to store your money while maintaining liquidity for when you
need it.
When you deposit money into a savings account, the bank or financial institution uses those
funds to provide loans or invest in financial markets. These activities generate revenue for
the bank, primarily through interest payments from borrowers or returns on investments.
To compensate you for holding your money with them, banks often pay interest.
2. Tax on savings interest
Interest from your savings is considered a type of income and may be subject to income tax.
To determine how much tax you might owe, it's important to understand the tax-free
allowances available to you.
- Personal Allowance: - The amount of income you can earn tax-free each tax year, which applies to wages, pensions, and savings interest. This is £12,570 (2024/25).
- Savings Starter Rate: - Up to £5,000 of tax-free interest on savings, depending on your other income. This rate gradually reduces as your income exceeds the Personal Allowance.
- Personal Savings Allowance (PSA): - Additional tax-free interest of up to £1,000 (basic-rate taxpayers) or £500 (higher-rate taxpayers), depending on your Income Tax band. Additional-rate taxpayers do not receive a PSA.
You receive these allowances each tax year, and the exact amount you qualify for depends on
your other income sources.
Calculating your allowances can be straightforward or complex, depending on the types of
financial products you hold. For help, try our Savings Allowance Calculator.
3. Personal Allowance
The Personal Allowance is the amount of income you can earn in a tax year before you start
paying Income Tax. How much Income Tax you pay depends on how much of your income exceeds
the Personal Allowance and which tax bands your income falls into.
Tax-free allowance
The standard Personal Allowance is £12,570. This means you do not have to pay tax on the
first £12,570 of your income. Your Personal Allowance may be:
- Increased: - if you claim Blind Person's Allowance. For the year 2024/5 this amount is £3,070 and is added to the amount of money you can earn before you start paying Income Tax.
- Reduced: - if your income exceeds £100,000. For every £2 over this threshold, your Personal Allowance decreases by £1. If your income exceeds £125,140, you lose your Personal Allowance entirely.
Income Tax Rates and Bands
The table below shows the income tax bands and rates for England, Wales, and Northern
Ireland. Tax bands differ if you live in Scotland.
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
If your income exceeds £125,140, you do not receive a Personal Allowance.
4. Starting rate for savings
The starting rate for savings allows you to earn up to £5,000 of savings interest tax-free
on top of your Personal Allowance. It is designed to benefit individuals with lower total
income by providing additional tax relief on their savings.
Eligibility
Eligibility for the starting rate depends on your total income, which includes wages,
pensions, and other taxable income. For every £1 of income above your Personal Allowance,
the £5,000 starting rate for savings is reduced by £1.
- If your total income is £17,570 or more: - You are not eligible for the starting rate for savings.
- If your total income is less than £17,570: - Your starting rate for savings is up to £5,000. However, every £1 of income above your Personal Allowance reduces this £5,000 by £1.
Example
If your total income (excluding savings interest) is £15,000, your Personal Allowance of
£12,570 covers the first £12,570 of income. The remaining £2,430 reduces the £5,000 starting
rate for savings to £2,570. This means you can earn up to £2,570 in savings interest
tax-free, in addition to the tax-free income covered by your Personal Allowance.
5. Personal Savings Allowance
The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings
without paying tax. It applies on top of your Personal Allowance and, if eligible, your
Savings Starter Rate, providing an additional tax-free threshold for savings interest.
Your Personal Savings Allowance depends on your Income Tax band. The higher your tax band,
the smaller your allowance. Additional-rate taxpayers do not receive a PSA.
Income Tax rates and allowances
The table below outlines the Income Tax bands and corresponding Personal Savings Allowance
for taxpayers in England, Wales, and Northern Ireland.
Note: tax bands and rates differ if you live in Scotland.
| Band | Taxable Income | Personal Savings Allowance |
|---|---|---|
| Basic Rate | £12,571 to £50,270 | £1,000 |
| Higher Rate | £50,271 to £125,140 | £500 |
| Additional Rate | Over £125,140 | £0 |
6. What savings income is included?
When calculating your allowance, you need to include income from various savings accounts.
Your Personal Savings Allowance applies to interest earned from these sources.
- Interest from banks and building societies.
- Interest from savings and credit union accounts.
- Interest distributions (not dividends) from unit trusts, open-ended investment companies, and investment trusts.
- Income from government or company bonds.
- Some types of purchased life annuity payments.
- Gains from certain life insurance contracts.
Different rules may apply to foreign savings and children's savings accounts.
7. What savings income is excluded?
Savings held in tax-free accounts are excluded from the Personal Savings Allowance because
the interest they earn is already tax-free. Examples include:
- Individual Savings Accounts (ISAs).
- Some National Savings and Investments (NS&I) products, such as Premium Bonds.
Different rules may apply to foreign savings and children's savings accounts. It's important
to review specific regulations if these situations apply to you.
8. Interest on joint accounts
If you hold a joint savings account, the interest earned is split equally between the
account holders. Each individual's share of the interest is applied to their Personal
Savings Allowance.
If you believe the interest should not be split equally (e.g., due to differing
contributions to the account), contact the HMRC savings helpline to request an adjustment.
9. If you go over your allowance
If your savings interest exceeds your Personal Savings Allowance, the excess is taxed at
your usual Income Tax rate. The rate you pay will depend on your Income Tax band.
For employed individuals or those receiving a pension, HMRC typically adjusts your tax code
automatically to account for the tax owed on savings interest. They estimate your tax based
on the previous year's savings income.
If you complete a Self Assessment tax return, you must report any interest earned on your
savings. Registration for Self Assessment is required if your total income from savings and
investments exceeds £10,000.
For those who do not work, do not receive a pension, and do not file a Self Assessment
return, your bank or building society will report your savings interest to HMRC at the end
of the tax year. HMRC will then notify you of any tax owed and provide instructions on how
to pay it.
10. If you have already paid tax on your savings income
If you have paid tax on your savings interest but it falls within your tax-free allowance,
you may be eligible to reclaim the overpaid tax. Claims must be made within 4 years of the
end of the relevant tax year.
You can claim your refund through your Self Assessment Tax Return if you file one. If you do
not use Self Assessment, complete form R40 and submit it
to HMRC. Processing typically takes around 6 weeks.
12. Worked example
The Personal Allowance, Savings Starter Rate, and Personal Savings Allowance work together
to maximize your tax-free savings opportunities. Here's how they complement each other:
Example: If your total income is £15,000:
- Personal Allowance: - Covers the first £12,570 of your income tax-free.
- Savings Starter Rate: - Reduces the £5,000 allowance by £2,430 (your income above the Personal Allowance), leaving £2,570 of savings interest tax-free.
- Personal Savings Allowance (PSA): - Adds another £1,000 of tax-free savings interest for basic-rate taxpayers.