Personal savings allowance

Earn up to £1,000 savings interest tax-free

The personal savings allowance (PSA) lets most people earn up to £1,000 in interest without paying tax on it. At current savings rates, you'd need to have just under £20,000 in the top easy-access savings account to exceed the allowance. This guide has full details on the PSA and how it works...

What is the personal savings allowance and what does it mean for my savings?

Your personal savings allowance (PSA) is a tax-free allowance that lets you earn interest on your savings without paying tax on that interest. The allowance you get depends on what rate of income tax you pay:

  • Basic-rate (20%) taxpayers: can earn £1,000 in savings interest per year with no tax
  • Higher-rate (40%) taxpayers: can earn £500 in savings interest per year with no tax
  • Additional-rate (45%) taxpayers: £0 – they do not get an allowance.

If you're a non-taxpayer – that is you have less than £12,570 income per year, you may be able to earn as much as £18,570 in savings interest tax-free. But it depends on how much income you do have, whether from a pension, or from working. Our Tax-free savings guide has full information.

What counts as savings interest under the personal savings allowance?

The PSA covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies (for example, US dollars, euros) held in UK-based savings accounts and expected profit from sharia accounts.

Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance (you have a separate allowance for that). The PSA does include 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.

Note for Scottish residents: You pay different rates of income tax, but for the purposes of the personal savings allowance the English tax bands are used – so for 2024/25, most will have the full £1,000 PSA if they earn up to £50,270.

How much do I need in savings before my interest is taxed?

This depends on both the interest rate and whether you're a basic, higher or additional-rate taxpayer. At current rates, you'd need savings between roughly £9,000 and £20,000. We've looked at how much you'd need in a few different savings accounts to hit the PSA thresholds (assuming current best-buy rates):

How much can I save before interest is taxed?

  Basic-rate taxpayer Higher-rate taxpayer Additional-rate taxpayer
Top easy access 5.1% AER £19,608 £9,804 N/A
Top 1yr fix 5.16% AER £19,380 £9,690 N/A

Rates correct as of 18 June 2024. Assumes constant balance.

It's worth noting that for the fixed-rate example above, we've assumed you take your interest monthly or annually, so you can withdraw it within a tax-year. The thresholds are lower if you take interest at maturity. This is important as...

You're taxed on savings interest in the tax year you can access it

These means if you opt for a fixed-rate savings account longer than a year, and choose for interest to be paid at maturity, then all that interest is counted towards the final year's PSA as that's when you can access it. The same is true if monthly or annual interest is paid by the bank into the fixed account, so you're unable to withdraw it until the date the fix matures. 

For example, save £7,000 in a five-year fix at 4.95% and you'd earn £347 annually in interest, easily within the PSA. Yet take that interest at maturity and it's £1,913. You benefit from compound interest by leaving it in the account (so earn £180 more overall) but you'd now exceed your PSA for that tax-year so would be liable to pay tax (around £183 for basic-rate and £565 for higher-rate).

Quick questions

  • Is this allowance the same as my income tax allowance?

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

    Yet your personal savings allowance is completely separate from the personal allowance most taxpayers get on their standard income. Under this, the vast majority of people can earn £12,570 before any tax is charged. 

    To know if you're getting this allowance, find your tax code. If it's not 1257L (or S1257L if you live in Scotland, or C1257L if in Wales) then check carefully whether it's correct. Our Tax code guide can help. Or, to find your current take-home pay, use our income tax calculator.

  • What is the £5,000 starting savings rate?

    If you earn less than £17,570, the starting savings rate allows you to earn up to £5,000 in savings interest completely tax-free. This is in addition to your personal income tax allowance and personal savings allowance.

    How much of the £5,000 allowance you get depends on how much you earn and can be quite complex – full info in Tax-free savings & the starting savings rate.

  • How does the allowance work for couples?

    We've a joint account

    In this scenario, the interest earned is assumed to be split down the middle.

    The basic-rate taxpayer gets £1,000 of personal savings allowance, and the higher-rate taxpayer £500. So, if we assume interest earned on the joint account is £1,000, the basic-rate payer will still have £500 of their PSA left, but the higher-rate payer's PSA will be used up. If they have other savings, they'll need to pay tax on any further interest.

    Having said this, savings on joint bank accounts is more complicated and HM Revenue & Customs suggests in this instance contacting it to report the saving income of interest as appropriate.

    We've separate accounts

    As sole account holders, interest earned on savings in your own accounts will count towards your individual PSAs. However, if one of you has maxed out your PSA and the other person hasn't, you could maximise your combined PSAs by moving some of your savings to the other person's account. This is not a decision to be taken lightly and you should only do this with someone you trust – as once the money is in the other person's account, it's no longer yours and you can't access it yourself.

    Another route if you’ve maxed out your PSA is to open a cash ISA any money saved in an ISA is tax-free and you can deposit up to £20,000 per year. See our Cash ISA page for full details and best buys. 

  • Can savings interest push me in to a higher rate income tax band?

    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 £50,270 in 2024/25), 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 £50,270 (in the 2024/25 tax year). You earn £50,269 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.

MSE weekly email

FREE weekly MoneySaving email 

For all the latest deals, guides and loopholes simply sign up today – it’s spam free!

So, does this mean I don't need a cash ISA?

While it's true to say that interest that's already tax-free – so ISA interest and Premium Bond 'winnings' – isn't included in the interest counted towards your PSA, these products can still be very useful. Here's Martin's view...

Interest rate rises mean many needlessly pay tax – this is where cash ISAs come in 

It used to be the case that, for most people, the personal savings allowance (PSA) meant that all their savings were tax-free. However, since rates have risen considerably over the last couple of years, this is no longer true. 

At current savings rates, basic-rate taxpayers need to have just under £20,000 in the top easy-access savings account to exceed the PSA (just under £10,000 for higher-rate taxpayers). 

This means that many savers needlessly pay tax – check now how much interest you’re earning and, if it’s enough to bust your PSA (or will be soon), then cash ISAs are a winner.

If you've used up your PSA, there are big tax advantages to savings in a cash ISA.

The most important thing to note is that cash ISA interest doesn't count towards your PSA, so you can earn it tax-free – and still have your full £1,000 (or £500) allowance.

  • Basic-rate taxpayers over the PSA limit. For every £100 interest you earn in normal savings you only get £80, whereas in an ISA you get all the £100. Therefore the normal savings rate would have to be 25% higher for it to beat a cash ISA.

  • Higher-rate taxpayers over the PSA limit. For every £100 interest you earn in normal savings you only get £60, whereas in an ISA you get all the £100. Therefore the normal savings rate would have to be 66% higher for it to beat a cash ISA.

  • Top-rate taxpayers. For every £100 interest you earn in normal savings you only get £55, whereas in an ISA you get all the £100. Therefore the normal savings rate would have to be 82% higher for it to beat a cash ISA.

Not hitting your PSA? Normal savings usually pay more than cash ISAs.

If you don't have enough saved to pay tax on your interest, when choosing a product, you're best off just going for the highest rate. It's uncommon for the top easy-access cash ISA to pay more than the top easy-access savings, so typically a cash ISA isn't worth it if you're not close to hitting your PSA. 

Top fixed savings also typically have higher rates than their cash ISA equivalent, though cash ISAs allow you to access your cash early (though you'll pay an interest penalty if you do), while top fixed savings don't – so if you want to lock cash away but there’s a chance you may need to access it during the term, a cash ISA offers greater flexibility.

I'm one of the people who does owe tax – how do I pay it?

Your bank or building society will pay all savings interest due to you gross (without tax taken off the amount). Yet it'll likely report the amount it's paid to you in interest to HM Revenue & Customs each tax year.

HMRC says any tax owing will be paid through changes to your tax code, if you're an employee or have a pension. So you'll get a lower personal allowance for income tax to pay any tax due on savings interest. HMRC will look at how much you got in saving interest last year and base your tax code next year on that if you went over your personal savings allowance.

Those who self-assess will continue to pay through that system.

If you've had a tax code change in the past and are now earning less interest than your PSA, you'll need to contact HMRC as it will need to adjust your 2024/25 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'. 

MSE weekly email

FREE weekly MoneySaving email 

For all the latest deals, guides and loopholes simply sign up today – it’s spam free!

Spotted out of date info/broken links? Email: brokenlink@moneysavingexpert.com