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The Personal Savings Allowance

The Personal Savings Allowance

In April 2016, the ‘Personal Savings allowance’ was introduced which fundamentally changed the way savings accounts were taxed. As a result of this change, approximately 95% of UK adults no longer pay tax on any savings, demonstrating just how big a change it was!

In April 2016, the ‘Personal Savings allowance’ was introduced which fundamentally changed the way savings accounts were taxed. As a result of this change, approximately 95% of UK adults no longer pay tax on any savings, demonstrating just how big a change it was!

Before April 6th 2016, basic-rate taxpayers lost £20 in tax for every £100 interest they earned, and higher rate taxpayers, £40.

The new personal savings allowance means that now every basic-rate taxpayer can earn up to £1,000 in interest without paying any tax on it. If you’re a higher rate taxpayer (40%) you can earn up to £500 in interest tax-free, but if you are an additional rate taxpayer (45%), you don't receive the allowance at all.

The personal savings allowance is thus a radical departure for savings creating a new tax bracket in its own right within the income tax system. It means that most people now need a very large amount of money held in savings before they hit the tax-paying threshold - particularly given the very low savings rates we are currently experiencing. If, for instance, you are a basic rate taxpayer and saved into an account paying a rate of interest of 1%, you could have £100,000 saved and still not pay any tax on the resulting interest of £1,000.

This therefore means that most people no longer pay tax on their savings interest, and banks and building societies have stopped deducting tax from savings account interest as you only have to pay tax on savings interest above your personal savings allowance.

It should be noted that interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance limit because it’s already tax-free. So, if you receive £500 in ISA interest, and you're a basic-rate taxpayer, you'll still have £1,000 of personal savings allowance to cover other interest earned. Also, interest from National Savings and Investments (NS&I) tax-free products, namely Fixed Interest Savings Certificates and Index-Linked Savings Certificates, (and also prizes won from Premium Bonds), don’t count towards your Personal Savings Allowance limit because they are already ‘tax-free’ products.

As well as the personal savings allowance, low income earners also benefit from the 0% 'starting rate' of income tax for up to £5,000 of savings interest. Therefore, if your overall taxable income from employment, plus your savings interest is £17,500 or less in the 2017/18 tax year, you will not pay tax on your savings income. This amount is made up of your annual Personal Allowance (for Income Tax) of £11,500 for this 2017/2018 tax year, plus the 0% starting rate for £5,000 of savings income, and also the £1,000 personal savings allowance as well. You therefore benefit from your ‘starting rate’ for savings allowance of £5,000 which is completely separate from the personal allowance of £11,500,  and your Personal savings allowance, before any tax is charged.

You should consider using your Cash ISA allowance, as well as the personal savings allowance, because there are still many reasons why a cash ISA could be a better place for your savings than an ordinary savings account. The interest on your cash ISA for example is tax-free, regardless of how much you earn, and does not count towards your personal savings allowance as stated above.

Therefore:

  • If you already have a large enough savings pot, that might mean you hit your £1,000 interest limit, you can still save into an ISA for more tax-free benefits.
  • An ISA is not dependent on tax status, so that if you became a higher or additional rate tax-payer in the future, you wouldn't lose out on tax efficiency. An individual can place up to £20,000 into a cash ISA in the 2017/18 tax year.

There is no guarantee that the personal savings allowance will be in place for ever. This means that, if it were to be withdrawn in future, all of your savings held in non-ISA accounts would become liable to tax again. You would only be able to transfer a small portion of your accumulated savings into an ISA then to shield it from tax.

Although interest rates are historically low, when they do start to increase the amount of savings you will need to tip you over the personal savings allowance limit of £1,000 would therefore reduce. This also means that one shouldn't turn ones back on cash ISAs because they still offer valuable, long-term tax efficiency. Nonetheless, the personal savings allowance remains a huge boost for savers, giving them the chance to earn tax-free interest across a range of savings, banking and investment products.

You do not need to do anything to claim your Personal Savings Allowance because, after April 2016, your savings interest has been paid gross, i.e. without tax being deducted. It is now down to the individual saver to settle any tax payments they need to pay. Therefore, If your savings interest exceeds the personal savings allowance, i.e. more than £1,000 (£500 for higher rate taxpayers), the HMRC will, where possible, normally collect any tax due automatically through a change to your tax code based on information provided by banks and building societies. Thus, if you do owe tax on savings interest, your personal allowance will be lowered from £11,500 so that you may pay the right amount of tax. If you're self-employed or if you currently complete a Self-Assessment tax return for any other reason, you'll continue to pay your tax by this method.


The content of this article is for your general information and use only, and is not intended to address your particular requirements.  The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.  Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.  No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation.  We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.  Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.