Personal Savings Allowance Explained

One of the UK income tax allowances available is the personal savings allowances lets UK individuals earn a certain amount of bank interest on their savings tax-free every tax year, depending on the rate of tax they pay.

In addition to the personal savings allowances, individuals can also use their personal allowances and the start rate for savings to help further reduce the amount of tax they pay on their savings. In this guide I look at each of these allowances, the order they get applied and what happens once each gets exceeded.

What Counts as Savings Income?

Some savings are tax-free such as ISAs and NS&I, so they do not count towards your personal savings allowance. Interest earned from the following types of accounts and investments do count towards your allowance:

  • bank and building society accounts
  • savings and credit union accounts
  • unit trusts, investment trusts and open-ended investment companies
  • peer-to-peer lending
  • trust funds
  • payment protection insurance (PPI)
  • government or company bonds
  • life annuity payments
  • some life insurance contracts

Source: HRMC

Starting Rate for Savings

The starting rate for savings entitles UK individuals with taxable income of up to £17,500 to earn up to £5,000 in bank interest tax-free. But the more you earn, the more the starting rate is reduced.

Your starting rate for savings is reduced by £1 for every £1 you earn over the personal allowance. That means by the time you earn £17,500 you are no longer eligible to claim the starting rate.


In the tax year 2020/2021 you earn £17,000 from your employment and get £500 of interest on your savings. You have used up your personal allowance on your employment income so your starting rate for savings is reduced by £4,500 (£17,000 – £12,500).

Your starting rate for savings is £500 (£5,000 – £4,500), meaning you do not have to pay tax on your savings.

What Happens Once You Exceed the Starting Rate?

Once your earnings go over £17,500 and you are no longer eligible for the starting rate for savings, then you may be able to claim the personal savings allowance.

What is the Personal Savings Allowance for 2020/2021?

The current savings personal savings allowance is:

  • Basic Rate Taxpayers (20%) £1,000
  • Higher Rate Taxpayers (40%) £500
  • Additional Rate Taxpayers (45%) £0

Is Personal Savings Allowance in Addition to Personal Allowance?

Yes, you are entitled to the personal savings allowance in addition to your personal allowance. Depending on your income, you can also benefit from the starting rate for savings.

The personal allowance can be used against all types of taxable income, whereas the personal savings allowance can only be used against interest on savings and investments.

What Happens if I Exceed my Personal Savings Allowance?

Once you exceed your allowance you’ll begin to pay income tax on your interest income. The amount you pay depends on how much you earn from your savings AND all your other forms of taxable income.

Here are the current income tax rates:

Personal allowance 0%£12,570£12,500
Basic rate 20%£12,570 to £50,270£12,501 to £50,000
Higher rate 40%£50,271 to £150,000£50,001 to £150,000
Additional rate 45%over £150,000over £150,000


In the tax year 2020/2021, you are employed with a salary of £45,000 and also earn £3,000 in interest from savings. Your total taxable income is £48,000 so you are not entitled to the starting rate for savings (which disappears when taxable income goes over £17,500).

You are a basic rate taxpayer and are eligible to claim the personal allowance in addition to the savings allowance. That means you’ll pay income tax of £6,900 which is worked out as follows:

Employment income£45,000
Interest income£3,000
Taxable income£48,000
Less: Personal Allowance£(12,500)
Less: Personal Savings Allowance£(1,000)
Adjusted taxable income£34,500
Income Tax Payable at 20%£6,900
Personal Savings Allowance Explained

It’s worth noting that your interest income has the ability to push you into being considered a higher rate taxpayers for the purposes of working out your personal savings allowance.

In the example above, if your gross salary was £48,000 your taxable income would become £51,000 reducing your personal savings allowance from £1,000 to £500 as you’ve become a higher-rate taxpayer.

How to Claim the Personal Savings Allowance

If you fill in a tax return, you’ll need to declare your interest in the main section. The personal savings allowance will be automatically applied when HMRC calculates your tax bill as part of finishing up your return.

If you are employed, HMRC can adjust your tax code so your pay your tax automatically.

Do Banks Declare Savings Interest to HMRC?

Banks will declare savings interest to HMRC if you are not employed, do not receive a pension and do not complete a tax return. Your bank will inform HMRC of how much interest you have received, then HMRC will contact you to pay any tax due.

Summary of Saving Tax Allowances

  • Taxable income up to £12,500 – entitled to the starting rate for savings meaning £5,000 of tax-free interest income;
  • Taxable income from £12,501 to £17,500 – entitled to the starting rate for savings meaning £5,000m tapered for earnings up to £17,500 and £1,000 personal savings allowance;
  • Taxable income from £17,501 to £50,000 – entitled to £1,000 personal savings allowance;
  • Taxable income from £50,001 to £150,000 – entitled to £500 personal savings allowance;
  • Taxable income over £150,000 – no entitlement to the starting rate for savings or personal savings allowance.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.