What is my Personal Savings Allowance?
For most of us, regular savings accounts aren’t tax-free. We’ll help you work out what tax you could be paying.
Key points
- Your Personal Savings Allowance (PSA) depends on your income and tax band.
- Basic rate taxpayers can earn up to £1,000 interest tax-free; higher rate taxpayers can earn up to £500.
- Interest from ISAs and winnings from Premium Bonds don't count towards your Personal Savings Allowance.
- If you exceed your allowance, you may need to pay tax through PAYE or a self-assessment tax return.
Putting money away for the future makes sense. With a savings account, you usually get a helping hand in the form of interest earned on the money you save. Unfortunately for some, you don’t get to keep all that extra cash. For most of us, the government also wants a slice, in the form of tax. How much tax you’ll pay on your interest depends on how much you earn, and availability of your Personal Savings Allowance (PSA).
What is the Personal Savings Allowance?
In the past, banks and building societies would deduct interest from your savings as you earned it. But in 2016, the government introduced the PSA. This is the amount of interest you can earn within a tax year before you have to pay any tax on it.
What counts towards my Personal Savings Allowance?
You may be getting interest on your money from lots of different places. You'll need to work out the total you've earned in a tax year that counts towards your PSA. This includes interest from:
- Savings accounts
- Current accounts
- Bonds, which are effectively loans to a government or company for a set period and pay regular interest
- Peer-to-peer (P2P) lending, when you loan money to individuals or businesses through P2P websites and receive interest
There are some places you can make a return, where it won’t count towards your PSA, such as:
- Cash ISAs
- Stocks and Shares ISAs
- Prizes from Premium Bonds
- Dividends from stocks and shares – with these you'll pay tax at the rate for dividend income where you exceed your dividence allowance.
Tax rules are subject to change and dependent on individual circumstances.
How much is the Personal Savings Allowance?
Your PSA changes based on your income level, and which tax band that puts you into.
Basic rate taxpayers paying tax at 20% can earn up to £1,000 in interest tax-free. If your income puts you into the higher rate tax bracket of 40%, your PSA drops to £500. If you’re an additional rate taxpayer paying tax at 45% you don’t qualify for a PSA.
What happens if I don't pay any income tax?
If you’re below the income tax threshold of £12,570 for 2025/2026, you’ll get a £1,000 PSA, but you could also benefit from the starting savings rate. This is an extra allowance to encourage people on low incomes to save. It allowas you to earn up to a further £5,000 in interest tax-free. That means you could earn up to £18,570 in income and savings interest before you need to pay any tax. You can find out more about the starting savings rate here.
Savings allowances and tax rates can change, so it’s always best to check what yours are before you make any decisions.
What happens if I exceed my Personal Savings Allowance?
You'll need to pay tax on interest you've earned above your PSA. That means on the total of all interest earned across any savings that exceed your PSA. The amount of tax you’ll pay will depend on your income tax bracket and how much interest you have earned.
Nil rate taxpayers
If your total income, including any interest, doesn't exceed your personal allowance of £12,570 you won't pay any tax on the interest you receive.
Basic rate taxpayers
As a basic rate taxpayer, you’ll pay tax at the rate of 20% on your savings interest above the £1,000 PSA. So if, after taking into account your personal allowance and any starting rate for savings, if you earn £1,500 in savings interest beyond your personal income tax allowance and any starting rate for savings, £1,000 will be covered by your PSA and you’ll pay 20% on the £500 remaining – so £100 in tax.
Higher rate taxpayers
If your overall income puts you in the higher rate tax band, you’ll pay 40% tax on your savings interest above your £500 PSA. For example, if you earn £1,500 in savings interest, £500 is covered by your PSA and you’ll pay 40% on the £1,000 remaining – so £400 in tax.
Additional rate taxpayers
If you’re an additional rate taxpayer, you don’t have a PSA. All your income from savings interest is taxed at 45%. Receiving £1,500 in interest with no PSA will mean a tax bill of £675.
How and when do I pay any tax I owe?
PAYE employees
If you're employed, where tax is deducted under PAYE from your pay every month, you should inform HMRC of your savings interest where it exceeds your personal savings allowance in a tax year. The extra tax owing can be deducted from your wages in the following tax year, as your tax code will change to cover the extra tax due. This is only possible if the amount of tax you owe is below £3,000.
Self-assessment tax return
Self-employed workers will have to report their savings interest when they declare their income on their self-assessment tax return each year. As a PAYE employee, completing a tax return is also a way to declare any money you've earned on top of your main employment income, such as rent from a property or interest on savings.
Once you've reported your savings interest on your return, you’ll pay the extra tax as part of your annual tax bill. It’s important to keep records of your savings interest, because if you don’t report it correctly, you could face penalties and interest payments.
As you’ll struggle to beat inflation after paying tax, it can be worthwhile to find places where you won’t pay tax on your income gains, like a cash ISA or a stocks and shares ISA.
Related articles
