The Personal Savings Allowance provides tax relief on any interest you’ve earned on your savings. In this article, you’ll learn more about the Personal Savings Allowance and how it impacts you and your income.
What is the Personal Savings Allowance?
The Personal Savings Allowance is a tax-free break on any income you earn from your savings. There are different levels of Personal Savings Allowance, depending on your income and taxpayer rate.
How much tax-free interest am I eligible to earn?
This depends entirely on how much you earn and therefore the tax rate that you pay.
If you pay tax at the basic-rate of 20%, you are eligible to earn up to £1,000 interest tax-free.
Those that pay the higher-tax rate of 40% are eligible to earn £500 interest tax-free.
For those falling into the additional-rate tax bracket, the Personal Savings Allowance doesn’t apply and you’ll need to pay tax on all interest earned from savings.
For example, if you earn £25,000 a year and receive £600 in account interest, you won’t need to pay any tax on that £600 as it’s within your £1,000 Personal Savings Allowance.
If you earned £1,500 in account interest, you wouldn’t need to pay tax on the first £1,000 but would need to pay a basic-rate tax of 20% on the remaining £500.
Are all savings covered by the Personal Savings Allowance?
Any savings that you have in a non-ISA or current account are covered by the Personal Savings Allowance. It also covers some investments, such as corporate bonds and investment trusts.
However, there are some exceptions. ISAs and some NS&I savings offerings, including Premium Bonds, are already tax free so aren’t covered by the Personal Savings Allowance.
How does the Personal Savings Allowance work?
You don’t need to do anything to claim your Personal Savings Allowance. Interest earned from your savings within the Personal Savings Allowance will be paid gross by your bank or building society, without taking any tax off.
Do I still need to complete an R85 form?
The Personal Savings Allowance replaced the R85 form when it came into effect in April 2016. That means you no longer need to complete an R85 form to receive interest on your savings tax-free.
How does the interest I earn impact the amount of tax I pay?
Income from your savings counts towards your overall income and therefore determine which tax band you fall into. This affects the level of Personal Savings Allowance you are entitled to.
How do I pay tax on any interest earned above my Personal Savings Allowance?