The Personal Savings Allowance is how much interest you can earn tax-free from a savings account, bond, or P2P loan.
How much you’re entitled to depends on how much you earn/how much tax you pay.
👉 If you earn less than £50,270 a year, you pay 20% tax. This makes you a basic rate taxpayer. In this case, you’ll have a personal savings allowance of £1,000.
Here’s an example of how it works:
Let’s say you earn £20,000 a year and get £250 in account interest. You won’t pay any tax because it’s less than your £1,000 allowance.
But if you earn £20,000 a year and get £1,500 in account interest, you won’t pay tax on your interest up to £1,000, but you’ll need to pay basic rate tax (20%) on the £500 that goes over.
👉 If you earn over £50,270, you pay 40% tax. This makes you a higher-rate taxpayer, and your allowance reduces to £500.
👉 Now if your annual income is above £125,140, this makes you an additional rate taxpayer (you pay 45% income tax). Additional rate taxpayers aren’t entitled to a personal savings allowance (sorry, we don’t make the rules 😅).
FYI: This allowance doesn’t apply to interest earned from ISA accounts or investment bonds as it will always be tax-free.
If you’re employed, HMRC will sort this for you by changing your tax code and automatically deducting the tax you owe. On the other hand, if you’re self-employed, you’ll have to report your savings interest tax on your annual tax return.
Unfortunately for taxpayers, paying the incorrect amount of tax is always a possibility 🥲
But don’t fret (too much) because if you’ve overpaid tax on your savings interest, you can claim this back by filling in an R40 form.
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