The Personal Savings Allowance explained

You can earn up to £1,000 in interest tax free without using an ISA.

Though Cash ISAs are popular places to put your savings, if your priority is getting the highest interest rate you might find you can earn more tax-free elsewhere, and that’s thanks to the Personal Savings Allowance, or PSA. Here’s who gets it, and how much you can have saved to qualify.

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What is the Personal Savings Allowance

The Personal Savings Allowance is a tax free amount most people can use each year to legally avoid paying tax on their interest earned from savings.

It’s set at £1,000 a year for those earning under £50,270. If you earn more than £1,000, that first £1,000 is still tax free and you’ll only pay tax on interest earned above £1,000. So for example earn £1,020 in a year, and you’ll pay 20% tax on £20, or a total of £4.

If you’re a higher rate taxpayer that allowance is halved, reducing to £500 a year. That means anything above this will be taxed at 40%.

Additional rate taxpayers don’t get any PSA, so all interest is taxed at their rate of 45%.

How much you need saved to go over the Personal Savings Allowance

Despite decent interest rates over the last few years making exceeding the PSA more likely, you still need hefty amounts in your savings account to do so, especially for basic rate taxpayers.

These example balances and rate will give you an idea of when you might fill your PSA, so save more than these and you’ll pay tax on the excess.

Interest rate	Amount saved to reach £1,000	Amount saved to reach £500
0.1%	£1,000,000	£500,000
1%	£100,000	£50,000
2%	£50,000	£25,000
3%	£33,333	£16,667
4%	£25,000	£12,500
5%	£20,000	£10,000
6%	£16,667	£8,333

Of course these sums are just a guide and in reality it’ll be more complicated working out when you go past your allowance.

They assume you’ve had the same amount saved at the same rate for a year. In reality you might have made some withdrawals, or added extra cash, as the year goes on. And any cash in easy access accounts could have seen the rate change, while fixed rate and regular savers might have matured part way through the year.

So you’ll need to keep an eye on interest payments so you’re fully across whether you’re going to breach the allowance or not – and plan accordingly.

A pay increase could change your allowance

Though right now you might think your PSA is more than enough for the amount of interest you’re likely to earn, a pay rise could push you into a new tax bracket, and therefore reduce the size of your tax free savings allowance.

With those Income Tax thresholds frozen until at least 2028, more and more of us will find our pay rises make us a higher taxpayer (it’s effectively a stealth tax hike).

So if you now earn £50,000, but get a £1,000 pay increase, you’ll find your PSA drops from £1,000 to £500, and then any additional interest is taxed at 40% rather than 20%.

If that’s possible, you might want to get ahead of the game and use more of your ISA allowance now, even if it’s at a lower interest rate.

Something to bear in mind with pay increases though is that by becoming a 40% (or 45% taxpayer) you don’t automatically see your allowance reduce. It’ll still be averaged out over the financial year. So it could be overall you’re still at a lower rate for that year (though that’ll change for the subsequent one).

There are also ways you could bring your PSA back down, including by adding more to your pension.

Warning: Fixed rate interest and the PSA

The above examples all relate to when you receive the tax. With most easy-access accounts that’ll be monthly. But with some regular savers and fixed-rate savers, it could be you get paid all the interest when the term is up. In fact, even if it’s paid monthly, if you can’t access it until the term is up, it’ll all count from that final date.

So let’s say you have £20,000 fixed for two years at 3%, and the interest is accessible at the end of the year rather than monthly. The total interest you’ll earn is £1,218, which will fill your entire PSA when it arrives, and you’d pay 20% tax on the £218 over the allowance (and any interest earned on other savings that year).

Not all longer term accounts pay interest in a lump sum like this, but check any accounts you have or plan to open so you can make sure any additional saving don’t also get taxed. This lump sum calculator will help you work out what you might make.

Other ways to avoid tax on interest

If you do find you’re going to go over your PSA, then it’s worth looking at Cash ISAs and Premium Bonds, though in some cases you might be better paying tax on your interest over the allowance than go for a lower savings rate. We’ve explained all the ways you can avoid tax on savings interest.