Personal Savings Allowance guide
Your Personal Savings Allowance (PSA) is one of the things you can use to maximise tax free savings. Read on to learn how much interest can you earn tax free with your PSA.
What is my Prsonal savings Allowance?
Your Personal Savings Allowance is the amount of interest you can earn on your savings without paying tax on the interest. It lets most people earn up to £1,000 in interest each year without paying any tax on it.
PSA covers any interest you earn from:
- Bank accounts
- Savings accounts
- Credit union accounts
- Corporate bonds
- Building societies
- Government bonds
- Gilts
- Interest earned on other currencies held in UK-based savings accounts.
How much is a Personal Savings Allowance?
The maximum amount of money you can earn tax-free savings on depends on what rate of income tax you pay. The table below shows which tax rate you fall under depending on your income, and how much interest you can earn tax-free.
| Tax rate | Taxable income | Personal Savings Allowance |
|---|---|---|
| Basic rate taxpayer | £12,571 - £50,270 | £1,000 |
| Higher rate taxpayer | £50,271 - £125,140 | £500 |
| Additional rate taxpayer | +£125,140 | £0
|
How much interest can I earn tax-free?
The amount of tax-free interest you can earn depends on what rate of income tax you pay. Currently, basic rate taxpayers can earn up to £1,000 in tax-free savings interest, which is equivalent to having just over £20,000 in an easy-access savings account. Any interest earned beyond this threshold would be subject to taxation, exceeding your Personal Savings Allowance (PSA).
You could also use your personal tax allowance and the starting rate for savings to maximise your tax-free interest.
What counts as savings interest?
Savings interest refers to interest made solely on the money deposited in savings accounts.
Interest earned from Individual Savings Accounts (ISAs) doesn’t contribute to your PSA. This is because interest earned through ISAs is exempt from taxation. This applies to both Fixed Rate ISAs and Variable Rate ISAs.
Frequently asked questions
How much can I have in savings before my interest is taxed?
The amount at which your interest income becomes subject to taxation depends on your tax status. For basic rate taxpayers in the UK, you can earn up to £1,000 in interest tax-free. Higher rate tax payers can earn £500 in interest. Beyond that threshold, your interest income would be subject to taxation. You could also use your personal tax allowance and the starting rate for savings to maximise your tax-free interest.
Is PSA the same as income tax allowance?
Your PSA is the amount of interest you can earn on your savings without having to pay tax on it. Your personal tax allowance is the amount of income you can earn before you have to pay tax. This could also include interest earned on savings.
Can savings interest push me into a higher tax bracket?
The simple answer is yes. If the total of your earned income plus your interest from savings moves you into the higher tax bracket then you would have to pay tax at the higher rate on the amount above the threshold. It would also reduce your Personal Savings Allowance from £1000 to £500.
Is the first £1,000 of interest tax-free?
If you are a basic rate taxpayer (you earn less than £50,270 per year) then you are entitled to earn £1,000 in interest tax-free each year. This can be interest earned in savings accounts, building societies, corporate bonds, and others. However, it doesn’t include interest earned in ISAs as this is tax-free.