Personal Savings Allowance (PSA)

What is a PSA and why does it matter to me?


What is a PSA

In a nutshell, it allows basic rate taxpayers to earn up to £1,000 interest on their non-ISA savings each tax year without paying any UK income tax on it.

Higher rate taxpayers have a PSA of £500 before they pay UK income tax while additional rate taxpayers don’t qualify for the PSA.

It’s set by the government, and depends on your annual income, which can include earnings from work, benefits and pensions, investments and savings.

What does the PSA mean for me?

Put simply, the PSA means that:

  • The first £1,000 of savings interest that basic rate taxpayers earn is free from UK income tax.
  • The first £500 for higher rate taxpayers is free from UK income tax.
  • Additional rate taxpayers do not have a PSA.

If you are a basic rate taxpayer, you could also benefit from the starting rate for savings. In addition to your personal savings allowance, that could amount to as much as £5,000 in tax free interest, reducing by every £1 of other income above your Personal Savings Allowance.

It’s your responsibility to pay any tax you may owe directly to HM Revenue & Customs, according to your individual circumstances.

More about savings allowances and tax

With limits set by the government, it’s important to understand how much you can save and earn in interest before you’re liable to pay tax.

If you’re looking for tax-efficient options, you might like to consider an Individual Savings Account – known more commonly as an ISA. In the current tax year, you could take advantage of an ISA allowance of up to £20,000.

Learn more at GOV.UK

Exceeding your Personal Savings Allowance

Any interest you earn must be declared for tax purposes.

It's your responsibility to report all income to HMRC (if required) and to pay any additional tax due on any taxable interest earned over and above your allowances – i.e. you don’t just report the bit above the allowances, you report all of it.

Paying tax on savings interest

Banks and other financial institutions report all interest to HM Revenue & Customs (HMRC) at the end of each tax year. If you’re employed, or you receive a pension, HMRC may change your tax code. This means if you need to pay tax on interest you’ve received, this will happen automatically.

If you complete a HMRC Self-Assessment tax return, you should report all earnings, including any interest earned on non-ISA savings, before working out and paying any tax due. Any amount of tax due will depend on your other sources of income, tax allowances and so on.

If you think you’ve overpaid, you can reclaim tax on your self-assessment, or by completing an R40 form – available from the gov.uk website.

Interest earned from money held in ISAs are an exception. These are free from income tax in the UK.