Personal Savings Allowance

The Personal Savings Allowance is the amount of interest you can earn from a savings account, bond or P2P loan without paying tax on it.

How much is the personal savings allowance?

How much you’re entitled to depends on how much you earn/how much tax you pay. If you earn less than £50,270 a year, you pay 20% tax. This makes you a basic rate taxpayer. In this case, you’ll have a personal savings allowance of £1,000.

Here’s an example of how it works:

Let’s say you earn £20,000 a year and get £250 in account interest. You won’t pay any tax because it’s less than your £1,000 allowance.

But if you earn £20,000 a year and get £1,500 in account interest, you won’t pay tax on your interest up to £1,000, but you’ll need to pay basic rate tax (20%) on the £500 that goes over.

• If you earn over £50,270, you pay 40% tax. This makes you a higher-rate taxpayer, and your allowance reduces to £500.

• If your annual income is above £125,140, this makes you an additional rate taxpayer (you pay 45% income tax). Additional rate taxpayers aren’t entitled to a personal savings allowance.

The Personal Savings Allowance doesn’t apply to interest earned from ISA accounts or investment bonds as it will always be tax-free.

How do you pay tax on your interest income?

If you’re employed, HMRC will sort this for you by changing your tax code and automatically deducting the tax you owe. On the other hand, if you’re self-employed, you’ll have to report your savings interest tax on your annual tax return.

Unfortunately for taxpayers, paying the incorrect amount of tax is always a possibility. If you have overpaid tax on your savings interest, you can claim this back by filling in an R40 form.