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 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.
The Personal Savings Allowance doesn’t apply to interest earned from ISA accounts or investment bonds as it will always be tax-free.
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.
Peer-to-peer loans (sometimes called “P2P loans”) are a kind of loan made through websites that match individual lenders with borrowers. They are done without a bank being involved in the process. As the lender, you can accrue interest on the loan and this counts towards your Personal Savings Allowance.
A capital gain is the difference between the price you buy your asset for and the price you sell for. When you make a profit on an asset, you may have to pay tax on it. In this instance, you may make a profit through accruing interest, so you may have to pay tax on this profit. To learn more about Capital Gains Tax, read our helpful glossary page!