Personal Savings Allowance

In short, no. Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is covered. This includes interest earned on other currencies (eg, US dollars, euros) held in UK-based savings accounts.

Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance. It also includes interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts and most types of purchased life annuity payments.

Simply, yes. However, the tricky question comes if your non-savings income, which would generally be income from work (whether employed or self-employed), is below the higher-rate threshold but your savings income would take you above it.

So do you get the £1,000 for basic-rate taxpayers or do you get the £500 for higher-rate taxpayers?

To work this out you first must add up your income from work and income from earned savings interest to get your total income. If that total income puts you in the higher-rate band (starts at £50,000 in 2020/21) then you are a higher-rate taxpayer and you only get the £500 of personal savings allowance (similarly for those at the additional-rate threshold – you wouldn't get the personal savings allowance at all).

Let's do an example...

The higher rate of tax starts on income above £50,000 (in the 2020/21 tax year). You earn £49,999 plus have £1,000 in savings interest. As your total income including interest is above the higher-rate threshold you'll only get the £500 personal savings allowance. So, £500 of your interest would be tax-free, while the remaining £500 would be taxed at the higher rate.

For a more detailed exploration of this, see Martin's blog on how the personal savings allowance means some will be better off earning LESS interest.

If you've more savings interest coming in than your personal savings allowance gives you, then your tax code will change. If your tax code is lower than the standard 1250L, as HMRC already expects, they will earn more in savings interest than their personal savings allowance covers.

If this has happened to you, and you won't earn more than £1,000 in savings interest (£500 for higher-rate taxpayers), contact HMRC as they will need to adjust your 2020/21 tax code to be correct. You can call it on 0300 200 3300 or go online to your personal tax account – go to 'check your income tax' and then 'tell us about a change'. 

This personal savings allowance is a radical departure for savings, creating it as a new tax bracket in its own right – within the income tax system. 

You will get your savings personal allowance. It is completely separate from the personal allowance all taxpayers get on their standard income, where most can currently earn £12,500 before any tax is charged.

However, as we mention above, if you do owe tax on savings interest, your personal allowance will be lowered from £12,500 so you pay the right amount of tax.

To see your current take-home pay, use our income tax calculator. 

We've been asked this a lot. The key about whether this is covered by the personal savings allowance or not is the ability to access the interest accruing on your account.

Almost all fixed-rate accounts don't let you touch either capital or interest during the term. So if you took out a five-year fixed-rate bond in January 2016, which only pays interest when it matures in, say, January 2021, then interest would be covered by the personal savings allowance as the interest only became accessible to you after the introduction of the PSA.

It's worth noting that the interest you receive when a fixed-rate bond matures could exceed your PSA for this year. HMRC's stance on this is that the tax is due when you receive the interest. Sadly you can't carry the PSA forward or backward into other tax years.