Ella Mower, Senior Content Writer at Moneyfactscompare.co.uk explains what you need to know about your Personal Savings Allowance and tax-free saving options.
Savers are usually encouraged to seek out the best returns on their hard-earned cash, but have you ever wondered about the tax implications of earning interest? Keep reading below for important information on your tax-free savings allowance, as well as an alternative to traditional savings accounts that could protect your money from the taxman.
What is the Personal Savings Allowance?
The Personal Savings Allowance (PSA) is the maximum amount of interest you can earn on your savings between 6 April and 5 April the following year before being taxed. This limit varies depending on your Income Tax band, and currently stands at:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional rate taxpayers.
What’s more, if you take home less than £17,570 in taxable income a year (including from a salary or pension), the ‘starting rate for savings’ may also allow you to to earn up to £5,000 in interest without being taxed.
While these thresholds may seem like plenty to some basic and higher-rate taxpayers, it should be noted the PSA limits have not changed since they were introduced in 2016. This is despite interest rates having risen significantly over the past eight years, and more people being dragged into a higher tax bracket due to wage growth and frozen Income Tax bands.
When looking for a new account, it’s therefore a good idea to first take stock of your current financial situation. After finding an attractive deal, a savings calculator could help work out how much interest you may receive and whether you’ll be taxed.
What happens if you exceed your allowance?
If you earn enough in interest on your savings to exceed your allowance, you’ll be taxed on the amount over the limit at your usual rate of Income Tax. This is collected automatically by HM Revenue and Customs (HMRC) if you’re employed or receive a pension, while those who earn more than £10,000 from savings and investments per year will need to complete a Self-Assessment tax return.
However, if none of these describe your situation, your bank or building society will typically contact HMRC with how much interest you’ve gained over the past tax-year; in turn, HMRC will either adjust your tax code or send you a tax bill.
How to protect your savings from tax
That being said, there are options to consider that won’t affect your PSA, such as an Individual Savings Account (ISA). You can deposit a combined total of up to £20,000 in ISAs each tax-year, with any interest automatically exempt from Income and Capital Gains Tax (CGT).
Just like more traditional savings accounts, there are a wide variety of ISAs to choose from depending on your needs. Easy access cash ISAs are perhaps the most flexible when it comes to adding to and withdrawing from your savings pot but offer a variable interest rate that can change with little notice. Alternatively, you can secure a guaranteed rate with a fixed cash ISA if you don’t mind having limited access to your funds. For more information on these accounts, or to compare rates, visit the Moneyfactscompare.co.uk ISA hub.
