What is the personal savings allowance and how does it work?

The personal savings allowance (PSA) is an annual allowance that helps most people earn interest on their savings.

We’ll explore the PSA in more detail, including the different allowances for basic, higher and additional rate taxpayers.

What is the personal savings allowance?

When you put your money in a savings account, you will likely earn interest on these funds, helping your savings grow over time. 

While you may think this money is considered part of your normal income, the PSA, which was introduced in April 2016, means that depending on your income, the interest you earn may be free from tax.  

Almost any type of savings account qualifies for the PSA. 

This means that interest accrued on anything from bank accounts to savings accounts, company bonds to government gilts will come under the PSA.  

What are the tax thresholds for the personal savings allowance?

Your PSA depends on your existing income bracket. 

The thresholds for the 2023/24 tax year are: 

• Basic rate taxpayers (20%): You can earn up to £1,000 a year tax-free. 

• Higher rate taxpayers (40%): You can earn up to £500 a year tax-free. 
• Additional rate taxpayers (45%): You don’t qualify for a PSA. 

Working out which threshold you’re in and how much allowance you have is harder than it might seem. 

To find out your allowance, you will need to add your taxable income to the total amount of interest you will earn on your savings.

It is this final figure that determines how much allowance you have.  

As interest rates have soared over the last few years but the PSA hasn’t changed, more people have been finding it easier to exceed their allowance, so this is something to be wary of.  

What is the savings starter rate?

As well as the personal savings allowance, if you are on a low income, you can also benefit from the ‘savings starter rate’.

This is an extra tax break that helps you pay little or no tax on your savings.  

This tax break means that up to £5,000 of your savings are tax-free if you earn between £12,570 and £17,570.

If your income is more than £17,570, you’re not eligible for the savings starter rate.  

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

Exactly how much you can save before you start paying tax depends on the interest rate on your savings account and your tax bracket.  

It's vital to note that you pay tax on your interest in the year you can access it.  

So, this is something to consider if you have a fixed-rate savings account with a period of over one year and choose to have the interest paid at maturity as the interest goes towards that year’s PSA.

This also applies if monthly or annual interest is paid into the fixed rate account by a bank, but you can’t access it until the maturity date. 

It’s worth paying close attention to your interest rate, when it’s paid and how you’ll receive it in case it exceeds your PSA.  

What do I do if I exceed my PSA and owe tax?

In most cases, HMRC will automatically adjust your tax code if you need to pay more tax.

So, if you have exceeded your PSA and need to pay tax, this should happen automatically.  

If you are self-employed or report your taxes through self-assessment, you can notify HMRC. 

Alternatively, you can contact HMRC or sign into your online tax account here. 

What if I overpay tax and I’m due a refund?

If you have overpaid tax and are due a refund, the process for reclaiming this money is the same as the above. 

Normally, HMRC will adjust your tax code and automatically refund you, although you can also ask for a refund by contacting the taxman.  

Is there a way to avoid exceeding my PSA?

If it’s looking like you might exceed your PSA, you should consider splitting your funds between your savings account and at least one Individual Savings Account (ISA). 

An ISA lets you deposit up to £20,000 annually, with the interest you earn on these funds tax-free. 

There are various types of ISAs you can use to protect your money, including a cash and stocks and shares ISA. The money you leave in these accounts benefits from tax-free interest.  

When saving for your future, financial advice can help. 

From finding the right investment opportunities to minimising your tax liability, you can connect with a financial adviser via Unbiased for vital guidance.