Tax on Savings: A Guide to Your Personal Savings Allowance

Here at Newcastle Building Society we appreciate that you work hard for your savings so, naturally, you want to make the most of them.

An important consideration when choosing a savings account is the rate of interest that you can look forward to - however depending on the amount of money you plan to save, you should be aware of whether you may need to pay tax on the savings interest that you accumulate.

Thanks to the Personal Savings Allowance in the UK, the majority of adults no longer pay any tax on their savings. Here we’ll explain in simple terms what exactly your Personal Savings Allowance is, what it means for you, and how you can take advantage of it to make your savings work harder for you!

What is a Personal Savings Allowance?

Your Personal Savings Allowance (PSA) is completely separate from the personal allowance all taxpayers have on their standard income. Your PSA refers to the amount of interest you can accumulate on your savings without having to pay tax and according to the UK Treasury, an estimated 95% of savers don’t have to pay any tax at all on the interest they earn on their savings.

How does a Personal Savings Allowance work?

A Personal Savings Allowance refers to the amount of interest you’re allowed to accumulate on your savings without having to pay tax on it. In other words, the amount of tax-free interest that you’re personally allowed on your savings.

An allowance is per tax year, which runs from 6th April to 5th April the following year. The highest amount of tax free interest you can get is £1,000 for basic rate tax payers. However, the exact amount is determined by how much you earn:

If you earn less than £17,000

For those of you whose total annual taxable income falls below £17,000 – this is including wages, profits, pensions and savings – you have no tax to pay on your savings income, even if this exceeds £1,000.

Basic Rate Taxpayers

Basic rate tax payers are those whose net income is between £17,000 and £43,000. Their Personal Savings Allowance is £1,000.

So, for example, if a basic rate tax payer received £900 in interest on their account, they wouldn’t have to pay any tax on this interest because it’s within their savings allowance of £1,000.

However, if this person saves a little more money and their total reaches £1,100, then they would be required to pay tax on the £100 they’ve exceeded on their Personal Savings Allowance.

Higher Rate Taxpayers

Higher rate taxpayers are identified as those who fall into the income band £43,001 - £150,000. The Personal Savings Allowance for higher rate taxpayers is £500.

So, just like the aforementioned example, the interest on the savings would have to exceed £500 for the holder to have to pay tax on it. Any amount of interest below this sum is completely tax-free.

Additional Rate Taxpayers

Additional rate taxpayers are those with an annual income above £150,000. This band doesn’t receive a Personal Savings Allowance. Therefore, those with an income above £150,000 should continue to report their savings income each year on their tax return.

How the Personal Savings Allowance Works with Joint Accounts?

When an account is shared, either by spouses or civil partners, then interest on the account is split equally between the two. Therefore, both account holders should count the interest on their half of the account towards their individual Personal Savings Allowance.

This means that if both parties are basic taxpayers, for example, then half of the account interest will count towards each of the spouse’s Personal Savings Allowance of £1000.

Alternatively, if one spouse is a basic rate taxpayer and the other is a higher rate tax payer, half of the interest will count towards the basic rate taxpayer’s Personal Savings Allowance of £1,000 and the other half will count towards their spouse’s Personal Savings Allowance of £500.

 

How do I claim my Personal Savings Allowance?

If you’re a basic rate taxpayer with £1,000 or less of savings income, then no action is necessary! Your account provider will not deduct tax from its interest payments to you.

On the other hand, if you’re a basic or higher-rate taxpayer and have savings income that exceeds the Personal Savings Allowance, HMRC will collect the tax due by changing your tax code. Your bank or building society will provide HMRC with the information that they need in order to do so.

If you are self-employed and fill out a Self-Assessment tax return, you will need to report your savings as part of this.

For the latest and most up-to-date guidance, take a look at the government’s Personal Savings Allowance information page.

If you are self-employed and fill out a Self-Assessment tax return, you will need to report your savings as part of this.

How can I get the most from my Personal Savings Allowance?

If you believe that you may exceed your Personal Savings Allowance within a given year, saving into a Cash ISA account will enable you to benefit from additional tax-free interest. As we explain in our thorough Cash ISAs guide, you can save up to £20,000 in one or more ISA accounts within the current tax year (2017/2018), regardless of which income band you fall into.

What’s more, thanks to our unique CustomISA service, you can spread your annual tax-free ISA allowance across as many Newcastle Building Society ISA accounts as you wish, helping you to reach your savings goals more quickly. Take a look at our CustomISA page to find out more.

 

For more information on savings accounts at the Newcastle and to compare our best current interest rates, take a look at our savings page or read our guide to the different types of savings accounts that we offer. We also detail more ways to enjoy tax-free savings, or reduce the amount of tax you pay on your savings in our blog post, Tax-Efficient Ways to Save Your Money. Should you have any questions regarding our savings accounts, you can call our friendly Savings team on 0345 734 4345 or book an appointment at your local Newcastle Building Society branch.