The personal savings allowances lets UK individuals earn a certain amount of interest on their savings tax-free every tax year, depending on the rate of tax they pay.
A tax year runs from 6 April to 5 April each year.
What is the Personal Savings Allowance for 2020/2021?
The current savings allowance is:
- Basic Rate Taxpayers (20%) £1,000
- Higher Rate Taxpayers (40%) £500
- Additional Rate Taxpayers (45%) £0
Starting Rate for Savings
If your income is less than £17,500 you may also be eligible to claim the starting rate for savings of up to £5,000.
Your starting rate for savings is reduced by £1 for every £1 you earn over the personal allowance which is £12,500 for 2020/2021.
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 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
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%||£12,500||£12,500|
|Basic rate 20%||£12,501 to £50,000||£12,501 to £50,000|
|Higher rate 40%||£50,001 and £150,000||£50,001 and £150,000|
|Additional rate 45%||over £150,000||over £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:
|Less: Personal Allowance||£(12,500)|
|Less: Personal Savings Allowance||£(1,000)|
|Adjusted taxable income||£34,500|
|Income Tax Payable at 20%||£6,900|
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 complete a tax return, you’ll need to declare your interest income on the form. 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.
New Here? Learn how to set up the financial side of your business with these easy to understand guides and resources:
- Sole Trader or Limited Company? – Download my free calculator to check which business structure would help you to pay less tax;
- Government Support For the Self-Employed During Coronavirus – Find out about the schemes available, which ones you are eligible for and how to claim;
- Tax Records and Bookkeeping – Understand what tax records you’ll need to keep and how to set up your own bookkeeping system;
- How to Fill In Your Tax Return Online – In this step-by-step guide, you’ll find everything you need to know to fill in your tax return online and beat the HMRC deadline.
- Self Employment Taxes Explained – Learn what taxes you’ll pay, how much and when;
- VAT Guides – From registration to de-registration, VAT schemes and thresholds, these guides will take you through the basics every UK small business owner needs to know;
- Invoice Template – Free template and step-by-step guide so you can get paid by your clients.