What is the Personal Savings Allowance and how much interest can I earn tax-free?

Full answer

The Personal Savings Allowance (PSA) means most savers with ordinary bank and building society savings pay no tax at all on their interest, but higher earners and those with larger savings balances can still face a genuine tax bill. **The allowance amounts by tax band** Basic rate taxpayers get a £1,000 Personal Savings Allowance, meaning the first £1,000 of savings interest each tax year is tax-free. Higher rate taxpayers get a reduced £500 allowance. Additional rate taxpayers (income above £125,140) get no Personal Savings Allowance at all -- every pound of savings interest they receive is taxable at their marginal rate. **How the allowance is used alongside other income** Your PSA sits on top of your Personal Allowance and any starting rate for savings you might qualify for (an additional £5,000 0% band for savings interest, but only available to those with very low other income, tapering away as non-savings income rises above the Personal Allowance) -- most people with a typical salary will not benefit from the separate starting rate for savings, since their non-savings income already exceeds the relevant threshold, but it can matter for retirees or others with low earned income. **Worked example** A basic rate taxpayer earns £30,000 in salary and receives £1,400 in savings interest during the tax year. Their £1,000 Personal Savings Allowance covers the first £1,000 of interest tax-free, leaving £400 taxed at their 20% basic rate, a tax bill of £80 on the savings interest. **How HMRC collects tax on savings interest** Since banks and building societies report interest paid directly to HMRC (rather than deducting tax at source, as used to happen before 2016), HMRC typically adjusts your tax code for the following year to collect any tax owed on savings interest automatically through PAYE, rather than requiring you to file a Self Assessment return purely for this -- though if your total savings interest and other untaxed income is substantial, you may still need to complete Self Assessment. **Effect of moving between tax bands** Because your Personal Savings Allowance depends on which tax band you are in, a pay rise that pushes you from basic rate into higher rate does not just increase tax on your salary -- it also halves your Personal Savings Allowance from £1,000 to £500, potentially creating an additional, easily overlooked tax charge on savings interest that was previously entirely tax-free. **ISAs remain unaffected** Interest earned within an ISA (cash ISA or the cash portion of a stocks and shares ISA) does not count towards your Personal Savings Allowance at all, and remains completely tax-free regardless of the amount or your tax band -- for savers with balances large enough that ordinary savings interest would exceed their PSA, maximising ISA allowances first is usually the most straightforward way to avoid the issue entirely. **Practical tip** With higher interest rates in recent years, many savers with previously modest, tax-free savings interest have found themselves exceeding their Personal Savings Allowance for the first time -- check your total interest across all accounts (not just one) against your allowance for your tax band, and consider shifting some savings into an ISA if you are regularly exceeding your PSA.

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