personal savings allowance

Personal Savings Allowance

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

The vast majority of UK adults no longer pay tax on savings interest. Previously, for every £100 in interest earned, basic-rate taxpayers lost £20 in tax and higher-rate taxpayers lost £40. Yet now the personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest per year without paying tax on it (higher-rate taxpayers £500), equivalent to the interest on about £180,000 in the top easy-access savings account.

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  • It depends on what rate of tax you pay:

    • Basic-rate (20%) taxpayers – will be able to earn £1,000 interest per year with no tax (so a max tax saving of £200 compared with before).
    • Higher-rate (40%) taxpayers – will be able to earn £500 interest per year with no tax (so a max tax saving of £200 compared with before).
    • Additional-rate (45%) taxpayers: £0 – they do not get an allowance.

    The estimate is that it takes 95% of savers out of paying any tax on their savings. See the Treasury's advice on tax on savings interest for more information.

    Note that if you live in Scotland and pay different rates of income tax, for the purposes of the personal savings allowance the English tax bands are used – so for 2020/21, most will have the full £1,000 PSA if you earn up to £50,000.

  • Here's a table of how much you'd need in a standard savings account to hit the thresholds (assuming current best-buy rates).

    Personal savings allowance 2020/21 – how much can I save per year before interest is taxed?
    Top easy access 0.55% AER £181,810 £90,900 N/A
    Top 2yr fix 1.04% AER £96,150 £48,070 N/A

    Rates correct as of 11 January 2021. Assumes constant balance.

  • 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.

  • No. Interest that is already tax-free isn't included – so this includes ISA interest and Premium Bond 'winnings'. Interest from these will still be paid tax-free, it just won't count toward your PSA limit. So, if you get £500 in ISA interest, and you're a basic-rate taxpayer, you'll still have £1,000 of PSA to cover other interest.

  • 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.

  • HM Revenue & Customs says any tax owing will be paid through changes to your tax code. So you'll get a lower personal allowance for income tax to pay any tax due on savings interest. Those who self-assess will continue to pay through that system (though a new digital system is replacing the annual tax return).

    Your bank or building society will pay all savings interest due to you gross (without tax taken off the amount).

  • 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'. 

  • Even after all these huge changes, cash ISAs aren't finished...

    Martin Lewis says...

    For most people the personal savings allowance will mean all of their savings are tax-free, and therefore when choosing a product, the basic question is simply "What pays the highest rate?"

    And for most people with under around £20,000 of total savings, cash ISAs won't be a winner. In fact all ISAs can generally be beaten for most people by top easy-access savings, and regular savings accounts.

    It's rare, but occasionally the top easy-access cash ISA pays more than the top easy-access savings; in which case even if there's no tax gain, if the rate is higher, use the ISA. Plus the top fixed ISAs allow you to access your cash early for a small interest penalty while the top fixed savings don't – so there can be other reasons ISAs win; for nerdy detail on this, see my Is the cash ISA dead? point.

    For bigger savers and higher earners a cash ISA is still a winner

    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) PSA allowance. Therefore for top-rate taxpayers or bigger savers who've used up the PSA, there are big tax advantages of saving in a cash ISA.

    • 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.

    So cash ISAs can be winners even with lower rates.

    Also it's worth remembering that while £1,000 a year interest seems a lot now with our current pitiful interest rates, if interest rates rise then more people will need to pay tax. So saving into an ISA now could protect you from future tax. 

    For more on this read the full Why the cash ISA isn't dead point in our ISA guide.

  • 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

  • Quite simply the answer is no. The same rules apply. 

  • 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.

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

    You will get £1,000 of personal savings allowance, and your partner will get £500. So, if we assume interest earned on the joint account is £1,000, your remaining personal allowance will be £500 and your partner's 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 HMRC suggests in this instance contacting them to report the saving income of interest as appropriate.

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