Understand the UK personal savings allowance, what income counts towards it and how to claim the allowance if you’re employed or self-employed.
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
What is the Personal Savings Allowance?
The personal savings allowance was introduced in 2016. It lets UK taxpayers can earn tax-free savings income every tax year. The amount they can earn before paying tax depends on the highest income tax band they fall into:
Personal Savings Allowance Rates 2023-24**
- Basic Rate Taxpayers (20%) £1,000
- Higher Rate Taxpayers (40%) £500
- Additional Rate Taxpayers (45%) £0
**the 2023-24 tax year runs from 6 April 2023 to 5 April 2024
Here’s an example:
In the tax year 2023-24, you are employed with a salary of £45,000. You also earn £1,000 in interest from savings. Your total taxable income is £48,000 so you are not entitled to the starting rate for savings.
As a basic rate taxpayer, you are eligible to claim the personal savings allowance of £1,000 in addition to the personal allowance. You savings income is therefore tax-free and you’ll pay income tax of £6,486:
| Employment income | £45,000 |
| Interest income | £1,000 |
| Taxable income | £46,000 |
| Less: Personal Allowance | £(12,570) |
| Less: Personal Savings Allowance | £(1,000) |
| Adjusted taxable income | £32,430 |
| Income Tax Payable at 20% | £6,486 |
What Counts as Towards the Personal Savings Allowance?
Interest earned from the following types of accounts and investments count as taxable income and the personal savings allowance can be used against them:
- 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
ISAs and NS&I are tax-free savings and do not count towards the personal savings allowance.
DID YOU KNOW
The personal savings allowance can be used alongside the personal allowance and the starting rate for savings along with investing in tax-free savings accounts like ISAs.
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 When You Exceed the Personal Savings Allowance
Once you exceed your allowance you’ll begin to pay income tax on your interest income. The amount of tax you’ll pay depends on how much you earn from your savings and all your other forms of taxable income.
Here’s an example:
In the tax year 2023-24, you are employed with a salary of £45,000 and also earn £3,000 from savings and investments. You are not entitled to the starting rate for savings.
As a basic rate taxpayer, you are eligible to claim the personal savings allowance of £1,000 so you’ll pay income tax on the remaining £2,000 and your employment income.
| Employment income | £45,000 |
| Interest income | £3,000 |
| Taxable income | £48,000 |
| Less: Personal Allowance | £(12,570) |
| Less: Personal Savings Allowance | £(1,000) |
| Adjusted taxable income | £34,430 |
| Income Tax Payable at 20% | £6,886 |
DID YOU KNOW
Interest income can push an individual into the higher rate income tax band for the purposes of working out their 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 of your return. The personal savings allowance will be automatically applied when HMRC calculates your tax bill as part of completing your tax return.
If you are employed, HMRC can adjust your tax code so you pay your tax automatically through your payslip.
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 fill in a tax return.
Your bank will inform HMRC of how much interest you have received, and then HMRC will contact you to pay any tax due.
SUMMARY OF UK SAVINGS TAX ALLOWANCES
- Taxable income up to £12,570 – entitled to the starting rate for savings of £5,000 tax-free interest income;
- Taxable income from £12,571 to £17,570 – entitled to the starting rate for savings meaning £5,000 tapered for earnings up to £17,570 and £1,000 personal savings allowance;
- Taxable income from £17,571 to £50,270 – entitled to £1,000 personal savings allowance;
- A taxable income from £50,271 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.
