Each tax year, most people can receive a certain amount of savings interest without having to pay tax on it, known as your Personal Savings Allowance.
Prior to 2016, interest from savings was paid with tax taken off unless you specifically asked for the interest to be paid tax free. Under current rules, however, you automatically receive a certain amount of interest without tax having been taken off.
Here, we explain how the Personal Savings Allowance works, and what you have to do if your returns exceed your Allowance.
How does the Personal Savings Allowance work?
The amount of tax-free Personal Savings Allowance you’re entitled to depends on whether you’re a basic, higher or additional rate taxpayer:
- You can get up to £1,000 a year in savings income tax free if you’re a basic rate taxpayer
- You can get up to £500 a year in savings income tax free if you’re a higher rate (40%) taxpayer
- You get no savings income tax free if you’re an additional rate (45%) taxpayer.
However, savers have a greater chance of breaching their Personal Savings Allowance (see more below) with the Bank of England base at 4.75%. The best instant access accounts are now paying around 5% interest, some of the highest rates since 2008.
HMRC expects over 2.7m people to be hit by savings tax in the previous 2023-24 tax year, up by 1m compared with estimates for the 2022-23 tax year, according to a Freedom of Information request submitted by AJ Bell. Before the Bank of England started hiking base rates back in 2021, a basic-rate taxpayer could have a massive £154,000 in savings in the top easy-access account before they reached their Personal Savings Allowance, but this has now been slashed to just £20,000 in the top easy-access account, or £10,000 if you’re a higher rate taxpayer.
Adam Thrower, Head of Savings at Shawbrook Bank said: “It’s shocking to know quite how many people could be sleepwalking into an avoidable tax bill by not paying attention to their savings. The Personal Savings Allowance has remained frozen since its inception, yet interest rates are much higher now compared to when this came into force, thus unaware savers could find themselves unnecessarily paying tax on their hard earned savings.”
What counts as savings income?
The Personal Savings Allowance doesn’t just affect interest from bank and building society savings. Here’s a list of savings and investment products you can have, which you can earn interest from tax free, up to the limits outlined above:
- Bank and building society accounts
- National Savings & Investments (NS&I) accounts
- Savings accounts with credit unions. Credit unions may not pay interest but may pay a dividend instead. However, this still counts towards your personal savings allowance
- Interest payments from unit trusts, investment trusts and OEICS (which stands for open ended investment companies)
- Income from government bonds (UK government bonds are called gilts)
- Income from company bonds (often called ‘corporate bonds)
- Income payments from purchased life annuities. These are not the same as pension annuities although they work in the same way. The payment you get is a mixture of your capital being paid back and interest. The interest part counts towards your personal allowance.
How much savings can you have tax free?
Savers are benefitting from some of the highest rates since 2008, so you don’t need to have as much money in savings as you previously did to breach your Personal Savings Allowance. The table below shows how much you can hold in savings before breaching your allowance, depending on how much interest you earn on your savings.
| Savings account paying an interest rate of | Non taxpayer or basic-rate taxpayer | Higher-rate taxpayer |
| 0.25% | £400,000 | £200,000 |
| 0.50% | £200,000 | £100,000 |
| 1.50% | £66,666.67 | £33,333.33 |
| 2.50% | £40,000 | £20,000.00 |
| 3.50% | £28,571.43 | £14,285.71 |
| 4.50% | £22,222.22 | £11,111.11 |
| 5.50% | £18,181.82 | £9,090.91 |
Source: Yorkshire Building Society
Rising savings rates mean that it may be worth considering a cash ISA, especially if you are a higher rate taxpayer. You can save up to £20,000 each year into ISAs and you won’t have to pay any tax on your returns. In the past, cash ISA rates have been pretty poor, but they are catching up with standard savings accounts now. You can find the best cash ISA rates in our guide Best cash ISA rates – which cash ISAs pay the most interest?
Paying tax on extra interest
If you earn more in interest than your Personal Savings Allowance, you’ll pay any tax you owe in one of two ways:
- If you’re employed: the extra tax will be taken by adjusting your Pay As You Earn (PAYE) tax code
- If you’re self-employed: you’ll have to declare the savings interest on your self-assessment tax return.
Banks and building societies should give HM Revenue and Customs the information they need about how much savings interest someone receives.
Bear in mind that there are other allowances for earning interest before you have to pay tax on it, namely
- your Personal Allowance (not the same as the Personal Savings Allowance)
- the starting rate for savings
Your Personal Allowance is the amount of money you can earn each tax year without paying tax. This tax year (2024/25) the Personal Allowance is £12,570. If you haven’t used this up on your wages, pension or other income, you can use this Allowance to earn interest tax-free.
The starting rate for savings will only apply to you if your income (such as your wages and pension) is less than £17,570 a year. If it is lower than this, you may also get up to a maximum £5,000 of interest and not have to pay tax on it (your starting rate for savings). Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
Example
If your work income is £15,500 and receive £250 interest on your savings, your £12,570 Personal Allowance will be used up by your work income.
The remaining £2,930 of your wages (£15,500 minus £12,570) reduces your starting rate for savings by £2,930.
Your remaining starting rate for savings is £2,070 (£5,000 minus £2,930), which means you won’t have to pay tax on your £250 savings interest.
Tax rules can be really complicated, so you may want to consider getting professional financial advice to help you work out the best ways you might be able to use annual allowances to your advantage. You can find a local financial advisor on VouchedFor* or Unbiased*, or for more information, check out our guide on How to find the right financial advisor for you.
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