What exactly is a personal savings allowance?
The personal savings allowance (PSA) is a benefit available to practically all UK taxpayers. It reduces the likelihood that you will pay tax on the interest you earn on your savings. The PSA is explained in detail in our handbook.
What exactly is a personal savings allowance?
The personal savings allowance is the amount of interest you can earn on your savings without paying tax each year.
The allowance is calculated based on your annual income. If you are a basic-rate (20%) taxpayer, you can earn interest on your savings of up to £1,000 tax-free each year. If you are a higher-rate (40%) taxpayer, you can earn £500 in savings interest tax-free per year. You are not eligible for the personal savings allowance if you are on the additional rate.
What is the personal savings allowance and how does it work?
The following examples demonstrate how the PSA works in practise for various levels of taxpayer.
If you earn £30,000 per year and receive £400 in savings interest, you will not pay tax because it is less than your £1,000 personal savings allowance.
However, if you receive £1,250 in savings interest, you must pay basic rate tax (20%) on the excess £250.
Higher-rate taxpayer: If you earn £70,000 per year and receive £300 in savings interest, you will not pay any tax because it is less than your personal savings limit of £500.
However, if you receive £800 in savings interest, you must pay 40% higher rate tax on the £300 that exceeds the threshold.
Additional rate taxpayer: The personal savings allowance is not available to additional rate taxpayers. If you earn more than £150,000 per year, you must pay tax on your savings interest.
How can I apply for my personal savings allowance?
You are not required to do anything to obtain the allowance. Interest is now paid directly into your account, with no deductions for taxes.
If your interest income exceeds your personal allowance, any tax due will be paid to HM Revenue and Customs (HMRC) via your tax code.
If you file a self-assessment tax return, you will instead refund any tax payable this way.
When is the personal savings allowance applicable?
The personal savings allowance applies to any interest earned in a calendar year, including interest earned from the following sources:
- Accounts at banks and building societies
- Accounts for savings and credit unions
- Unit trusts, investment trusts, and open-ended investment corporations are all types of trusts.
- Peer-to-peer financing
- Trust money
- Interest on payouts from payment protection insurance (PPI)
- Government bonds or corporate bonds
- Payments from a life annuity
- Certain life insurance policies
The personal savings allowance does not apply to interest that is already tax-free, such as interest from individual savings accounts (ISAs) or Premium Bond winners.
So, if you win £100 in Premium Bonds and receive £100 in ISA interest, you'll still have £1,000 in your personal savings account to cover any other interest you may earn.
What is the distinction between the personal savings allowance and the personal tax exemption?
The personal savings allowance is determined by your income and affects the amount of tax you pay on savings interest.
The personal tax allowance is the amount of money you can make before paying taxes. For 2022/23, the personal tax allowance is set at £12,570.
How do I file a claim if I overpaid on my savings interest?
Savings interest is now taxed automatically, but you may be eligible for a tax refund if you did not spend your entire personal savings allowance and paid too much tax on your interest.
If you have had tax deducted on any interest and have not utilised all of your personal savings allowance, you can claim a refund using government form R40. It usually takes six weeks to receive the tax refund.