Personal Savings Allowance Guide
The personal savings allowance lets you earn up to £1000 before you have to pay a penny in tax. Read on to learn what this means to your savings.
The vast majority of savers in the UK no longer pay any tax on interest earned through savings thanks to a 2016 rule change: the introduction of the personal savings allowance.
You might have missed the change when it debuted, but it’s an important one to understand because the personal savings allowance is one of the biggest changes to savings in the last few decades.
How does the personal savings allowance work?
Before the rules changed in 2016, people had to pay tax on all savings they held that weren’t sheltered from tax with an ISA. That meant that basic rate taxpayers would pay 20p in tax for every £1 they earned, while higher-rate taxpayers would pay 40p of every £1.
Now, basic-rate taxpayers can earn £1000 a year in interest without paying any tax, while higher-rate taxpayers can earn £500. This means both can save as much as £200 a year. Top-rate taxpayers, however, don’t get any allowance. So how much can I save tax-free?
The returns you earn on your savings will vary depending on your interest rate. However, with so many accounts paying so little right now, basic-rate taxpayers would need to have many tens of thousands of pounds squirrelled away before they’d brush up against the limit.
The government estimates that this rule change will mean 95% of taxpayers won’t pay any tax on their savings.
Is this just for savings accounts?
The personal savings allowance protects the interest you earn on standard accounts with banks and building societies, but also many others.
These include interest earned on credit union accounts, corporate bonds and gilts, through peer-to-peer lending and usually on life annuity payments.
If in doubt, check with your account provider.
How do I pay tax if I earn more than the allowance?
If you do earn enough in interest that you need to pay tax, this is usually collected via your PAYE payments. You can expect to see your PAYE code change when that happens.
If you usually fill out a self-assessment tax return, then that’s where you declare your returns.
What if I need help with my personal savings allowance?
If you are worried you have not paid enough tax, it’s a good idea to seek help. That way you avoid an unexpected tax bill later on.
Fortunately, HMRC has a savings helpline to talk you through anything you’re confused about.
Is it different in Scotland?
North of the border the tax thresholds are slightly different, but for the personal savings allowance they use the English tax bands.
What if I think I’ve paid too much tax?
These rules do complicate tax, so if you think you’ve paid too much then you can contact HMRC and ask for it back. Fill out the R40 form, available via the gov.uk website.
Wait, what about my ISA?
One other way to maximise the tax-efficiency of your savings — that’s a fancy way of saying, ‘pay less tax’ — is with an ISA. And returns on ISA savings don’t count towards your personal tax allowance, meaning you potentially get two tax-free ways to save.
Whether you decide to use both is up to you. You may decide that your personal tax allowance means you don’t need to use an ISA. Or you could use an ISA to shelter stocks and shares investments instead, as the personal savings allowance won’t apply to returns on these holdings.
Remember that the rules on taxing interest could change, but future governments are less likely to remove the tax-free status of money held in ISAs.
Felicity is a personal finance journalist. She regularly writes for The Times, The Mirror and The Independent. She has won five awards for her work, including Household Money Journalist of the year. Read more