Your tax free savings allowance, also known as a Personal Savings Allowance, is a way for most people to earn interest from savings without paying tax.
The current tax year is from 6 April 2019 to 5 April 2020 so keep in mind that a tax year isn't the same as a normal year.
What is my Personal Savings Allowance?
The Personal Savings Allowance lets you earn up to £1,000 interest tax-free if you're a basic-rate tax payer or up to £500 if you're a higher-rate taxpayer. In other words, it lets savers grow the money they save tax free.
Additional-rate taxpayers don't get a Personal Savings Allowance though and if you earn more than £150,000 a year you'll need to pay tax on all savings.
How much is the Personal Savings Allowance?
Your Personal Savings Allowance depends on how much of your income is taxable, and the rate of tax you pay:
Basic-rate (20%) taxpayers will be able to earn up to £1,000 interest per year with no tax (income of £12,501 to £50,000)
Higher-rate (40%) taxpayers will be able to earn up to £500 interest per year with no tax (income of £50,001 to £150,000)
Additional-rate (45%) taxpayers don't get a Personal Savings Allowance (income of £150,000)
If your taxable income is less than £17,500 you won't pay tax on any savings income! Read more about how that works here.
Do I have to pay tax on my savings?
The Personal Savings Allowance only applies to interest you earn from non-ISA savings accounts and current accounts. This is because if you have a cash ISA, the interest you get is tax free.
There are some National Savings and Investments (NS&I) products that are also tax-free and so don't count towards your Personal Savings Allowance either. Examples of these products are fixed interest and index-linked National Savings Certificates and Premium Bonds. The NS&I website has more information on NS&I products.
What is savings income?
The Personal Savings Allowance applies to other types of savings income. Savings income is interest you earn on your savings. It includes interest from:
Bank and building society accounts
Accounts with providers like credit unions and National Savings and Investments (NS&I)
Authorised unit trusts, investment trusts and open-ended investment companies
Payment protection insurance (PPI) and other mis-sold financial products
Income from government or company bonds
Some life insurance contracts
What happens if I go over my Personal Savings Allowance?
If you go over your Personal Savings Allowance, tax is collected automatically using information that is provided by banks and building societies.
If you're employed, get a pension or complete a Self-Assessment tax return, HMRC will change your tax code automatically.
If you're not employed, you don't get a pension and you haven't completed a Self-Assessment tax return, your bank or building society will tell HMRC how much interest you earned last year and HMRC will tell you if you need to pay tax and how to go about this.
What happens if I've paid too much?
If you've paid too much tax on your savings interest, you can reclaim this amount by filling in a R40 form and sending it to HMRC. It should take about six weeks to get this tax back and you can claim tax on savings from up to four tax years ago.
How does the Personal Savings Allowance work with a joint account?
With a joint account, interest is split equally between the account holders. However, if you think this should be split differently, contact the savings helpline.
Do I have to tell HMRC about savings interest?
You don't need to do anything to claim your Personal Savings Allowance unless you're a joint bank account holder and you're not in Self-Assessment. You'll need to complete a Self-Assessment form to report your saving income or interest.
There's more information on this here or you can contact the savings helpline for more advice! The above is a guide only but if you're looking for tax advice and more information check out the HMRC website.
Can my tax-free savings push me into a higher income tax band?
Yes! It can. To work out whether your savings have pushed you into a higher income tax band, you have to look at whether your non-savings income (usually income from work) is below the higher-rate threshold but your tax-free savings take you above it.
Here's how it works:
Add up your income from work and income from earned savings interest, to get your total income.
If that total puts you in the band of higher-rate taxpayers (starts at £50,000 in 2019/20), then you're a higher-rate taxpayer.
This means you would get £500 tax-free for higher-rate taxpayers.
What's my personal allowance?
Each of us has a 'personal allowance'. This is the amount we can earn without paying any income tax.
If you earn more than your personal allowance, you pay tax at the applicable income tax rate on all earnings above the personal allowance, but the allowance itself remains untaxed.
Is the personal savings allowance the same as a personal allowance?
No. Personal allowance is something all taxpayers get on their standard income. For the 2019/20 tax year, the basic personal allowance will be £12,500. This means that during 2019/20, a taxpayer will need to receive taxable income over £12,500 before they pay any income tax. You can find out more about personal allowance here.
The above is a guide only, taken from tax years 2019/20 but if you're looking for tax advice and more information check out the HMRC website.
This post was updated on 11th October 2019