Personal Savings Allowance Explained

The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings tax-free per tax year. This excludes ISAs, which have their own tax-free allowance.

The size of your Personal Savings Allowance will depend on how much you earn. It’s determined by your yearly taxable income:

• If you’re a basic rate taxpayer, your Personal Savings Allowance entitles you to earn £1000 of savings interest tax-free
• If you’re a higher rate taxpayer, you can earn £500 of savings interest tax-free
• If you’re an additional rate taxpayer, you’re not eligible for a Personal Savings Allowance

Income tax bands are different if you live in Scotland, but you’ll still pay the same tax on savings interest as you would elsewhere in the United Kingdom.

For more information on paying tax on savings accounts and Personal Savings Allowances, visit GOV.UK.

How much tax will I pay on savings?

How much tax you’ll pay on your savings depends on your Personal Savings Allowance and several other factors, including:

• Your Personal Allowance — this is different from your Personal Savings Allowance. Your Personal Allowance is the amount you can earn in total (i.e. across your wages, pension and savings combined) before you start paying taxes. This is usually £12,570 but may be higher if you claim Marriage Allowance or Blind Person’s Allowance.
• Your starting rate for savings — if your income is less than £17,570, you may be able to earn additional savings interest without paying tax. The maximum starting rate for savings is £5,000. For every £1 of income above your Personal Allowance (commonly £12,570), your starting rate will reduce by £1. So if you earn £13,570 (and your PSA is £12,570), you can earn £4,000 of savings interest tax-free.
• The type of savings accounts you hold — you can deposit up to £20,000 in an ISA each tax year and earn tax-free interest on this amount for as long as it remains in the account. You can save up to this amount in one type of account or split the allowance across some or all of the other types such as a Lifetime ISA or a stocks and shares ISA. You can only pay £4,000 into a Lifetime ISA in a tax year. Savings in an ISA do not contribute to your Personal Allowance, Personal Savings Allowance, or starting rate for savings.

What types of savings income does the Personal Savings Allowance apply to?

Both the Personal Savings Allowance and starting rate for savings apply to interest earnt from:

• Savings and credit union accounts
• Bank accounts
• Accounts held with building societies
• Open-ended investment companies (OEICs)
• Investment trusts
• Unit trusts
• Life annuity payments
• Some life insurance contracts
• Company bonds
• Government bonds
• Peer-to-peer lending

How do I pay tax on savings interest if I owe it?

If you’ve earnt interest on an account that isn’t an ISA and you’ve exhausted your Personal Allowance, Personal Savings Allowance, and your starting rate for savings, you’ll need to pay tax.

When you earn savings interest, you’ll receive it as gross (without tax deductions). HM Revenue & Customs (HMRC) is aware of these earnings and will adjust your tax code so that you pay tax on this interest (if you’re liable). If you’re employed, you don’t need to do anything; HMRC will automatically change your tax code so that you’ll pay tax if you need to. If you usually submit a self-assessment tax return, you’ll still need to do this and can detail any interest earnt there.

As HMRC bases your tax code on last year’s earnings, you may be overpaying tax if you stop receiving interest. To correct this, you can contact HMRC on 0300 200 3300 or via your online personal tax account. You can also reclaim any overpaid tax via an R40 form, or your usual self-assessment (if this applies).

Are there any tax-free savings accounts?

Some savings accounts are always exempt from tax, regardless of your other earnings or Personal Savings Allowance.

Every tax year, you have a tax-free ISA allowance. For the 2023/24 tax year, this is £20,000, meaning you can deposit this amount and earn interest on it without paying tax. The annual ISA allowances are cumulative, so you can deposit up to the limit each year and benefit from tax-free interest for as long as the money remains in an ISA. For more information on ISA allowances, visit our ISAs explained guide.

Since the introduction of the Personal Savings Allowance on 6 April 2016, many people can earn tax-free interest on savings in whatever type of account they choose. This is because most people will have a Personal Savings Allowance and this tax-free savings limit is often enough to cover the interest they’ll make.

Ready to take advantage of your Personal Savings Allowance?

At Shawbrook, we offer a range of award-winning savings accounts to suit your needs.

If you want to regularly access your savings, our easy access account gives you flexibility. You can gain next working access and if you’re a regular saver, you can keep depositing funds too.

Our cash ISA products are tax-free. You can choose either an easy access or a fixed rate product depending on how often you think you’ll need to access your money. Transferring your cash ISA with Shawbrook is simple, find out more here.

If you’re able to lock your money away for a period of time, our fixed rate bonds help you make the most of your money. Simply choose how long you want to invest for and enjoy a fixed interest rate. You won’t be able to access your funds before the end of the agreed term, but you’ll receive a fixed higher rate in return.

If you want to earn an attractive rate of interest whilst also having a bit more flexibility than a fixed rate bond, then our notice account could be the right fit. Just let us know in advance when you want to access your savings.

You can find out more about our different savings accounts and their current interest rates on our main savings page. If you spot one that suits you, it’s simple to open an account online and start saving today.