By Clare Yates
4 min read
It’s worth noting that the allowance applies to most types of interest you might earn, from your everyday savings account to some investments and insurance products. However, not every account or investment is included, so understanding the rules ensures you make the most of this benefit.
What is my Personal Savings Allowance?
Your Personal Savings Allowance (PSA) is the amount of interest you can earn on savings each tax year without paying tax on it. Your allowance depends on your income tax band:
Basic-rate taxpayers: Can earn up to £1,000 in interest tax-free each year. These savers can earn a generous allowance of tax-free interest each year, making it easier to grow their savings without worrying about tax.
Higher-rate taxpayers: Can earn up to £500 in interest tax-free each year. The allowance is lower, reflecting the higher income tax band, but it still provides some relief on interest earned.
Additional-rate taxpayers: This group doesn’t get a personal savings allowance, meaning all the interest they earn is taxable, so careful planning is essential.
If your other income, such as wages or pensions, is below a certain level, you might also qualify for something called the “starting rate for savings”. This means you can earn up to £5,000 in savings interest each year and not pay any tax on it.
What type of savings does the Personal Savings Allowance apply to?
From traditional bank accounts to bonds and even some insurance products, a variety of sources can contribute to your allowance. But the allowance doesn’t cover every type of interest, so it’s worth knowing which savings and investments count.
As explained at GOV.UK, your Personal Savings Allowance will apply to any interest you get from:
Bank and building society accounts.
Savings and credit union accounts.
Unit trusts, investment trusts and open-ended investment companies.
Peer-to-peer lending.
Trust funds.
Payment protection insurance (PPI).
Government or company bonds.
Life annuity payments.
Some life insurance contracts.
Money in tax-free accounts like Individual Savings Accounts (ISAs) and certain National Savings & Investments products are already covered as tax-free savings, so they won’t eat into your allowance.
Knowing your PSA is valuable when you’re planning your savings strategy. It can help you make smarter decisions about where to put your money and how to structure your accounts. For example, if your interest earnings are likely to exceed your allowance, it may be worth considering tax-efficient options like ISAs to keep more of your returns.
How do I claim my Personal Savings Allowance?
The good news is that you don’t need to do anything to claim your Personal Savings Allowance. However, it’s worth keeping an eye on your total interest to make sure you don’t accidentally exceed the allowance.
If your interest exceeds your allowance, you’ll typically need to declare the extra on your tax return and pay the appropriate tax. You can learn more about this in our guide to tax on savings interest.
For those with multiple savings accounts, this can sometimes be tricky to track, so keeping a record of your interest throughout the year can prevent any surprises.
Want to check if you owe the taxman? HMRC has an online tool to help some savers calculate the tax due on interest from savings.
Making the most of your allowance
The PSA is designed to reward savers, but there are ways to make it work even harder for you. Keeping your money in tax-efficient accounts and monitoring your interest can help you maximise your tax-free earnings.
Spread your savings: Using multiple accounts can help you take advantage of higher interest rates while staying within your allowance.
Choose tax-efficient accounts: ISAs are completely tax-free, so interest earned here doesn’t count against your personal savings allowance.
Monitor your interest: Regularly checking your statements ensures you know when you are getting close to reaching your allowance, helping you stay on top of your finances.
Plan for larger sums: If you have significant savings, consider splitting money between PSA-eligible accounts and ISAs to make the most of both tax-free opportunities.
And remember, the Personal Savings Allowance is reviewed by the government and can change, so it’s worth keeping up to date each tax year.