The Personal Savings Allowance (PSA) is the amount you are allowed to earn through interest paid on your savings without paying any additional income tax.
The amount of this allowance depends on which income tax bracket you are in but the Treasury estimates it will take 95% of savers out of paying any tax on their savings.
Make the Most of Your Personal Savings Allowance
How Much is the Personal Savings Allowance?
The size of your Personal Savings Allowance depends on your tax bracket.
- If you have taxable income of under £17,000, you will not pay any tax on your savings income.
- Basic rate taxpayers can earn £1,000 in interest before paying tax on it.
For the 2018-19 tax year, this means those earning a salary of up to £34,500.
The basic personal allowance increased to £11,850 in April 2018, meaning those earning up to £46,350 are now on the lower tax rate and eligible to earn £1000 in savings interest before it is taxed.
- Higher rate taxpayers can earn £500 in interest before paying tax on it.
For the 2018-19 tax year, this applies to those earning a salary of between £34,501 and £150,000.
Plus the personal allowance for income tax of £11,850, means this income amount is £46,351. This means that the threshold at which you pay the higher tax rate will increase to £46,351 in April 2018.
- Additional rate taxpayers do not get a Personal Savings Allowance and must pay tax on any interest earned.
This applies to those earning a salary in excess of £150,000.
Note that the allowance applies to the amount of interest you earn, not the total amount of savings you have.
It also works on ‘adjusted net income’ – which is your income less any tax relief, such as charitable donations.
What Were the Previous Saving Tax Allowance Rules?
The Personal Savings Allowance was introduced in April 2016. Before this, interest earned on regular savings accounts was treated as earnings for tax purposes.
That meant that basic rate taxpayers earning more than the personal allowance for Income Tax would pay 20% tax on any interest earned. Higher rate taxpayers would pay 40%.
This made tax-free savings accounts such as ISAs very attractive to many savers.
With the introduction of the Personal Savings Allowance, all savings accounts are tax-free to a certain point. This means that regular savings accounts might outperform ISAs if they have higher interest rates.
What Types of Saving Does it Apply To?
Earnings from dividends on shares or funds are not covered. If you have savings in an ISA or receive tax-free Premium Bond ‘winnings’, these will still be tax-free and any interest earned will not count towards your allowance.Last updated: July 20th, 2018