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What is a personal savings allowance?

If you’re a UK taxpayer, you might have a personal savings allowance (PSA). Set by the government, it’s the amount of tax-free interest you can earn on your savings each tax year.

Tax could apply to anything over and above your personal savings allowance.

How does the personal savings allowance work?

Your personal savings allowance depends on your income and tax bracket:

  • Basic-rate taxpayers (20%) - up to £1000 of earned savings interest is tax-free.
  • Higher-rate taxpayers (40%) - up to £500 of earned savings interest is tax-free.
  • Additional-rate taxpayers (45%+) - no tax-free allowance.

If you earn less than £17,570 a year, you could also benefit from the starting rate for savings. That could amount to as much as £5,000 in tax free interest, in addition to your personal saving allowance.

It’s your responsibility to report and pay tax on any interest earned over and above your allowances.

What income is covered by the personal savings allowance?

The personal savings allowance applies to any savings income, which includes:

  • Interest earned on non-ISA savings accounts and current accounts. 
  • Income from corporate bonds and government bonds.
  • Interest distributions from authorised unit trusts, open-ended investment companies and investment trusts.

Visit HM Revenue & Customs

Declaring and paying tax

If you complete a self-assessment tax return, you should declare all streams of income, including any interest you’ve earned from your savings. This will be used to calculate any tax you owe.

If you’ve overpaid, you can reclaim tax in a couple of ways. You could do it on your self-assessment return, or by completing an R40 form – available at gov.uk.

Banks and other financial providers are not always required to deduct tax from any interest you earn, so it’s your responsibility to make sure you’ve paid any tax owed. What they will do though, is report any interest earned to HM Revenue & Customs (HMRC) at the end of each tax year. HMRC might use this information to change your tax code to collect any tax due throughout the year. They may adjust your tax code even if you complete a self assessment return.

Tax-efficient savings

In addition to a personal savings allowance, if you’re a UK taxpayer, you could take advantage of an ISA allowance. In the current tax year, this can be used to save and earn interest on up to £20,0000 – tax-free!

Why choose an ISA?

  • Build a tax-free savings pot year after year. From buying a house, to saving for retirement, an ISA could help you to reach your savings goal.
  • Some ISAs let you withdraw money when you need it. As long as you replace it within the same tax year, it might not affect your overall ISA allowance.
  • Additional-rate taxpayers might not have a personal savings allowance, but can still benefit from tax-free savings by opening an ISA.
  • ISAs might also offer higher interest rates than standard saving accounts.

There are several ISA types available. At Halifax, we offer both cash ISAs and stocks and shares ISAs.

The ISA you choose may depend on:

  • your personal saving goals.
  • how flexible you need an ISA to be - you could earn more interest if you lock your money in.
  • how much risk you're comfortable with, Cash ISAs offer relatively predictable returns, while investment ISA returns can go up and down over time. 

See available ISAs

Looking for more help?

To learn more about tax on your income, including interest earned on your savings, visit the HMRC website.

Why save with Halifax?

Plenty to choose from

Whether you need easy access to your money or can fix for a longer term to earn more interest. 

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It's easy to keep track of your savings using Online Banking or the Mobile Banking app. 

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Open a savings account online today.  On selected accounts, start saving with as little as a £1.

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