Personal Savings Allowance: tax on your savings interest

The Personal Savings Allowance lets most UK residents earn some interest on their savings tax-free. ONLYWAY NEWS explains the allowance amounts, how the starting rate for savings works and how HMRC collects any tax, relying only on official GOV.UK pages.

What is the Personal Savings Allowance?

It is the amount of savings interest you can earn in a tax year without paying tax on it. According to GOV.UK, most people can earn some interest from their savings without paying tax on it. Only interest above the allowance is taxed, and it is taxed at your usual Income Tax rate.

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How big is the allowance by tax band?

The amount depends on your Income Tax band. According to GOV.UK, the allowance is:

• £1,000 for basic rate taxpayers;
• £500 for higher rate taxpayers;
• £0 for additional rate taxpayers.

So an additional rate taxpayer has no savings allowance and pays tax on all interest above any other relief that applies.

What is the starting rate for savings?

It is an extra relief of up to £5,000 of interest tax-free. GOV.UK states that if your other taxable income (not including savings interest or dividends) is less than £17,570, you can get the starting rate for savings. Every £1 of other income above your Personal Allowance (£12,570) reduces your starting rate for savings by £1. This relief and the Personal Savings Allowance itself stack on top of the Personal Allowance.

Is interest in an ISA taxed?

No. According to GOV.UK, you do not usually have to pay tax on interest earned from savings in accounts like Individual Savings Accounts (ISAs), and some National Savings and Investments products. Interest in an ISA therefore does not use up your Personal Savings Allowance.

How does HMRC learn about interest and collect the tax?

After 5 April each year, your bank or building society tells HMRC about any interest they paid you for the previous year. HMRC adds together interest from all your savings accounts. If your interest is £10,000 or less and you do not file a return, the tax is usually collected by changing your tax code: the code may change to collect tax owed from the previous year or to include an estimate of interest for the current year. Tax calculations are usually sent between June and the following March. If you have no tax code or it cannot be changed, HMRC may send a Simple Assessment letter.

When do you need a Self Assessment return?

If your savings interest is over £10,000, you must report it on a Self Assessment return. If your bank tells HMRC you earned more than £10,000, HMRC will send a notice to file a return; if you are not registered, you will need to register. GOV.UK also notes that if you owe tax but do not get a letter by 31 March of the following tax year, you must contact HMRC. ONLYWAY NEWS advises checking your own figures against your bank statements.