What is the Personal Savings Allowance?

The personal savings allowance is a tax free sum covering interest from personal savings. It is the total you are allowed to receive in interest before having to pay income tax.

Interest from savings is usually classed by HMRC as taxable income meaning you will need to pay tax according to your level of income, the tax free savings allowance and starting rate for savings.

Your personal savings allowance is different from your tax free personal allowance which is the amount of income you are allowed to earn before paying income tax.

How much is the Personal Savings Allowance?

The personal savings allowance is different depending on the highest rate of tax you pay on your income. The starter rate of savings is also relevant to some lower earners.

Most people pay tax at the basic rate which means you can receive interest up to £1000 tax free.

For higher rate taxpayers the savings allowance reduces to £500 and then to a zero allowance for additional rate taxpayers.

Personal Savings Allowance Bands:

• No tax: You are eligible for the £5000 starter rate of savings.
• Basic rate with income of £12571 up to £17570: You are eligible for the £5000.00 starter rate savings and the £1000 personal savings allowance.
• Basic rate taxpayers: You are eligible for the PSA worth £1000.
• Higher rate taxpayers: You are eligible for the PSA worth £500.
• Additional rate taxpayers: You are entitled to zero tax free allowances.

Is Savings Interest classed as income?

Yes, savings is classed as income so you need to add it to your other income to get your total income figure.

Your savings interest could take your income into a higher tax bracket because HMRC deem it to be taxable.

How much tax do I pay on Savings Interest?

Tax will be deducted from your savings interest after any applicable tax free allowances at the rate you pay tax normally.

The tax rates are at 20%, 40% or 45% with the same rate being used to tax your interest and your other income.

What interest from savings does the Personal Savings Allowance cover?

Not all savings income is covered by the personal savings allowance and starting rate for savings.

The PSA and starting rate is applicable against the following savings interest sources:

• Bank accounts.
• Building society accounts.
• Bavings and credit union accounts.
• Life annuity payments.
• Trust funds.
• Peer-to-peer lending.
• PPI refunds (interest element of PPI refund payouts).
• Unit trusts.
• Investment trusts and open-ended investment companies.
• Government or company bonds.
• Some life insurance contracts.

Personal Savings Allowance for higher rate taxpayers

Higher rate taxpayers have a PSA worth £500 per tax year which is 50% less than £1000 given to basic rate taxpayers.

It’s common for higher rate taxpayers to complete a self assessment tax return with any interest from savings needing to be declared on your tax return.

What is the Starting Rate for Savings?

The starting rate for savings is separate to the PSA and lets lower earners receive an amount of interest from savings without tax being paid.

To be eligible for the starting rate for savings your other income must be below £17570 and you still receive the benefit of the £1000 PSA.

The maximum starting rate for savings is £5000 with the rate reducing by £1 for every £1 of earnings you receive from other income above your personal allowance.

Your personal allowance is how much income you can earn tax free with the basic allowance being £12570.

This means that in this example your starting rate reduces by £1 for every £1 of income in between £12570 and £17570.

Savings Interest and Self Assessment

Individuals who complete a self assessment tax return must detail any interest earned from savings on their tax return.

Any applicable tax free savings allowance will be automatically used when your tax return is processed by HMRC.

If you are due a savings interest tax rebate this will be calculated by HMRC when they process your return.

If you don’t complete a self assessment tax return and your interest income from savings is over £10,000 HMRC expect you to register for self assessment.

How do I pay tax on Interest from Savings?

The way in which you pay income tax on your savings interest depends on the type of income you have and if you complete a tax return.

Employed under PAYE or get a Pension:

HMRC will usually change your tax code using an estimate of savings interest income based on the previous tax year.

Your employer or pension provider will use the tax code generated by HMRC which should mean you pay tax automatically as per the estimated interest figures calculated by HMRC.

Self Assessment:

Tax due on interest income declared on a tax return will be calculated by HMRC when they have received your tax return.

The interest income will show on your SA302 tax calculation and a total tax due figure form all taxable income.

Savings Interest Tax Rebate

A savings interest tax rebate can be due if:

• Your interest income is covered by one or both of the starting rate of tax for savings or personal savings allowance.

OR

• You didn’t earn enough to pay tax.

Saving Interest Tax Rebate through PAYE

A claim can be backdated for the last four tax years so you may be able to make a savings interest tax rebate claim for multiple tax years at the same time.

To make a claim for a savings interest tax rebate you will need to complete an R40 or an R43 if you live outside of the UK.

Unlike most other tax rebate claims you don’t need to wait until a tax year actually ends to submit your form.

The R40 can be submitted online via .GOV or by post. To fill in the R40 by hand you can download the form online or you can call HMRC so they can post you a form on 0300 200 3300.

Savings Interest Tax Rebate through Self Assessment

If you complete a self assessment tax return you don’t need an R40 form because any refund due will be repaid after HMRC have administered your tax return.

Your tax return should include your savings interest figure(s) and any tax deducted from your savings income.

The self assessment system will automatically include any applicable tax free savings allowances as part of your tax calculation for that tax year.