Personal Savings Allowance Explained

Wondering how much can you have in savings before paying tax? Then wonder no more! Understand how the personal savings allowance works including how UK taxpayers can benefit from tax-free savings, how it affects their personal allowance and how much they can claim.

Updated 4 November 2021

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.

1. What is the Personal Savings Allowance?

The personal savings allowance is a UK income tax allowance available that 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.

UK individuals can also use their personal allowance and the starting rate for savings to help further reduce the amount of income tax they pay on their savings along with investing in tax-free savings accounts like ISAs.

2. What Counts as Savings Income?

Some savings are tax-free such as ISAs and NS&I, so they do not count towards the personal savings allowance. In addition to tax-free savings, 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

3. 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 £17,570 you are no longer eligible to claim the starting rate.


In the tax year 2021/2022, 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 £4,430 (£17,000 – £12,570).

Your starting rate for savings is £570 (£5,000 – £4,430), meaning you do not have to pay tax on your savings.

4. What Happens Once You Exceed the Starting Rate?

Once your earnings go over £17,570 and you are no longer eligible for the starting rate for savings, you may be able to claim the personal savings allowance.

5. What is the Personal Savings Allowance for 2021/2022?

The personal savings allowance for 2021/2022 is:

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

The recent Autumn Budget suggested that these rates would remain in place for the next tax year starting April 2022.

6. 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.

7. 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.

The income tax rates for 2021/2022 and 2022/2023 tax years are:

  • 20% (basic rate) on income between £12,570 to £50,270
  • 40% (higher rate) on income between £50,271 to £150,000
  • 45% (additional rate) over £150,000

8. How is the Personal Savings Allowance Calculated?

In the tax year 2021/2022, 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 £17,570).

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£(12,570)
Less: Personal Savings Allowance£(1,000)
Adjusted taxable income£34,430
Income Tax Payable at 20%£6,886
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.

9. 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 finishing up your return.

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

10. 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.

11. Summary of Saving Tax Allowances

  • Taxable income up to £12,570 – entitled to the starting rate for savings meaning £5,000 of 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;
  • 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.


Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek and money nerd helping financial DIY-ers organise their money so they can hit their goals quicker.