Personal Savings Allowance: Your Guide to Tax-Free Interest

Alan Bermingham

10 Years of Expertise in Fintech Innovation

3 min read

Earning interest on your savings doesn't have to mean paying tax on every penny. The government gives you a tax-free buffer on savings interest each year. This is called your personal savings allowance. Most people can earn hundreds of pounds in interest without paying a penny in tax.

In this article, we'll cover everything you need to know about maximising your personal savings allowance.

What exactly is a personal savings allowance?

Your personal savings allowance is your annual tax-free limit on savings interest. It covers interest from banks, building societies, and other savings accounts.

Basic rate taxpayers get £1,000 tax-free interest each year. Higher rate taxpayers receive £500 tax-free interest annually.

Additional rate taxpayers don't get any personal savings allowance at all. This allowance is completely separate from your main income tax allowance.

Professional woman checking her personal saving allowance online

How much can you actually earn tax-free?

The amount depends entirely on your tax bracket. If you pay 20% basic rate tax, you get £1,000 annual tax-free interest.

Higher rate taxpayers at 40% get £500 tax-free interest per year. Additional rate taxpayers at 45% get nothing. These limits apply to gross interest earned, not your account balance. Married couples each get their own separate allowance.

Unfortunately, you can't carry unused allowance forward to next year. However, you can still make the most of what you have by understanding other tax-free opportunities, including the £1,000 Trading Allowance.

Which types of savings count towards your allowance?

Interest from high street bank savings accounts counts towards your allowance. Building society account interest payments are included too.

Credit union dividend payments fall under this allowance. Additionally, peer-to-peer lending platform returns count as well.

Government bonds and corporate bond interest are covered by the allowance. Some National Savings & Investments products count, but not all of them.

Premium Bond prizes don't count as they're already tax-free. Furthermore, ISA interest doesn't use up your allowance either.

Two people engaged in discussing about their saving for the tax free interest

What happens when you go over your limit?

HMRC automatically calculates tax on any excess interest you earn. If you're employed, tax gets taken through your PAYE code adjustment. Self-employed people declare excess interest on their annual tax return. You'll pay your normal income tax rate on the amount over your limit.

Banks report your interest to HMRC automatically each year. Fortunately, you don't need to track this yourself as it's handled automatically.

How can you maximise your tax-free savings?

Spread your money across multiple accounts for better interest rates.Consider ISAs for extra tax-free savings beyond your personal allowance, alongside understanding available Annual Investment Allowance benefits if you run a business. Use both partners' allowances if you're married or in a civil partnership. Time large deposits to spread interest across different tax years when possible.

Choose accounts with competitive rates to make the most of your limit. Keep an eye on your total interest throughout the year to avoid surprises. A colleague recently discovered she was earning just 0.1% on her savings account. She switched to a better account and now maximises her full £1,000 allowance each year.

Switch accounts if you find better rates elsewhere. Additionally, consider splitting large sums between different providers for better overall returns.

Do you need to tell HMRC about your savings interest?

Most people don't need to do anything at all about their savings interest. Banks report interest payments to HMRC automatically throughout the year. Your tax code adjusts automatically if you go over the limit. Only complete a tax return if HMRC specifically asks you to do so.

Keep your interest statements for your own records and reference. Contact HMRC only if you think your tax code looks wrong or unusual. The system works smoothly for most savers without any intervention required. However, it's worth checking your tax code annually to ensure accuracy.

Your personal savings allowance gives most people plenty of room for tax-free interest earnings. With interest rates rising, it's worth checking you're getting the best possible return. Use both ISAs and your personal savings allowance to shelter as much as possible from tax. Review your current savings accounts and see if you could earn more tax-free interest.

HMRC handles most of the paperwork automatically, so you can focus on growing your savings.This makes managing your tax affairs much simpler than many people expect, particularly when combined with an understanding of the Personal Allowance for Pensioners and other available tax reliefs.

Man focused of checking his personal savings allowance

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