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Personal Savings Allowance: How it works

By HMRC September 2016

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Contents
1. Introduction
2. What counts as savings income
3. If your taxable income is less than £17,000
4. How much your Personal Savings Allowance will be
5. Examples: basic rate
6. Examples: higher rate
7. What you need to do

1. Introduction

From 6 April 2016, if you’re a basic rate taxpayer you’ll be able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers will be able to earn up to £500. This is called the Personal Savings Allowance.
This means:
• most people will no longer pay tax on savings interest
• banks and building societies will stop deducting tax from your account interest
If you already receive interest without tax being taken off, you’ll no longer need to tell your bank or building society that you qualify for tax-free interest.

2. What counts as savings income
Savings income includes account interest from:
• bank and building society accounts
• accounts with providers like credit unions or National Savings and Investments
It also includes:
• interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
• income from government or company bonds
• most types of purchased life annuity payments
Interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
Interest from National Savings and Investments (NS&I) tax-free products, namely Fixed Interest Savings Certificates and Index-linked Savings Certificates; and prizes won from Premium Bonds, also doesn’t count towards your Personal Savings Allowance because it’s already tax-free.

3. If your taxable income is less than £17,000
If your total taxable income is less than £17,000 you won’t pay tax on any savings income.

4. How much your Personal Savings Allowance will be
The amount of your Personal Savings Allowance depends on your adjusted net income.
The table shows your allowance from 6 April 2016, depending on whether you’re a basic, higher or additional rate taxpayer. 

Tax rate Income band (adjusted net income) Personal Savings Allowance
Basic 20% Up to £43,000 Up to £1,000 in savings income is tax-free
Higher 40% £43,001 - £150,000 Up to £500 in savings income is tax-free

Additional 45%

Over £150,000

No Personal Savings Allowance


5. Examples: basic rate

5.1 You earn £20,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £1,000 Personal Savings Allowance.

5.2 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 interest over your Personal Savings Allowance.

6. Examples: higher rate

6.1 You earn £60,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £500 Personal Savings Allowance.

6.2 You earn £60,000 a year and get £1,100 in account interest.
You won’t pay tax on your interest up to £500. But you’ll need to pay higher rate tax (40%) on the £600 interest over your Personal Savings Allowance.

7. What you need to do
You don’t need to do anything to claim your Personal Savings Allowance.

If you’re a basic rate taxpayer and have savings income or interest of more than £1,000 (£500 for higher rate taxpayers), you’ll have to pay some tax on this. But you don’t need to do anything yet.

HMRC will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do this.

If you fill in a Self Assessment tax return you should carry on doing this as normal.