Can the Personal Savings Allowance strengthen your finances?
The Personal Savings Allowance means you could earn tax-free interest, but it has its limitations. We explore how you can benefit, and how you pay tax on savings interest in the UK.
This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.
Healthy savings are essential for balanced personal finances. It’s one of the reasons the UK government provides tax relief on interest. But how useful is the Personal Savings Allowance (PSA) to you, and how can you get the most out of it?
In this article we’ll explore the Personal Savings Allowance. We’ll cover how much interest you can earn tax free, and why high-interest savings accounts are an attractive option for growing wealth.
What is the Personal Savings Allowance?
The amount that you can make in interest on your savings in the UK without paying tax. The relief is capped at a maximum of £1,000. But there are other ways to earn interest before paying tax, such as opening ISAs.
The Personal Savings Allowance for 2024/25
Your allowance depends on the highest rate of Income Tax you pay. Below, we’ve outlined the three tiers and how much interest you earn tax free:
| Tax rate | Income | PSA Allowance |
| Personal Allowance | £0 - £12,570 | £1,000 |
| Basic | £12,570 - £50,270 | £1,000 |
| Higher | £50,270 - £125,140 | £500 |
| Additional | Over £125,140 | None |
If you live in Scotland, the rates are slightly different:
| Tax rate | Income | PSA Allowance |
| Personal Allowance | £0 - £12,570 | £1,000 |
| Starter | £12,570 - £14,876 | £1,000 |
| Basic | £14,877 - £26,561 | £1,000 |
| Intermediate | £26,562 - £43,662 | £1,000 |
| Higher | £43,663 - £75,000 | £500 |
| Advanced | £75,001 - £125,140 | None |
| Top | Over £125,141 | None |
If you have dependents that are working in low-pay industries at the start of their career, they could benefit from the Personal Savings Allowance, even if you’re a higher rate taxpayer.
Let’s explore how this might work.
Example: how a dependent can benefit from the Personal Savings Allowance
Paul is a Finance Director and his son, Louis, has just graduated university. Louis is looking for a job in the tech sector to use his degree, but hiring is currently slow. Both Paul and Louis live in England.
In the meantime, he’s working and earning the minimum wage. He works approximately 30 hours a week on a zero-hour contract.
Paul has saved sensibly over the years and is on track for a comfortable retirement. He decides to gift an early inheritance to Louis, investing £20,000 into high-interest notice savings accounts through Flagstone.
Assuming Louis doesn’t withdraw his funds, he can earn £960 in interest through the Personal Savings Allowance, tax free, every year that he earns under £50,271 in income (the Higher rate of tax). *
*This calculation is based on a live Flagstone account on offer at the time of writing. Exact calculations vary depending on availability and personal circumstances. This is an illustrative example only.
How does the Personal Savings Allowance compare to ISAs?
The Personal Savings Allowance isn’t the only way you can reduce the tax burden on your savings. ISAs are designed to allow you to save up to £20,000 a year before paying tax. You don’t pay tax on the interest or dividends you make in an ISA.
There are five main types of ISA:
- Cash ISA: A bank account where you can place cash deposits.
- Stocks and shares ISA: An investment account where you can purchase stocks and shares.
- Innovative Finance ISA (IFISA): An investment account where you can loan money to support businesses.
- Lifetime ISA (LISA): A savings account designed for first time buyers (replacing the Help to Buy ISA) and people saving for retirement. The UK government pays an annual bonus of up to £1,000 directly into LISA accounts, depending on how much you contribute.
- Junior ISA (JISA): A savings account for children, locking their money away until they turn 18.
Unlike the Personal Savings Allowance, your tax-free interest isn’t limited by your income in an ISA. This is why ISAs are an attractive option for high earners looking to maximise interest.
Is it better to invest or save if you don’t benefit from the Personal Savings Allowance?
In general, investing has the potential to scale your returns at a higher level. But it is much riskier, and you could lose what you invest if the unexpected occurs.
Holding your savings in a bank account is lower risk, which can result in slower growth. But if you leave your money for a long time, you benefit from compound interest, especially when you have significant cash deposits and competitive interest rates.
Investments can also benefit from compound interest. But as their value is much more volatile, you could still lose more than you invest. This is why building a balanced portfolio is a useful way to protect your wealth.
The right approach for you will ultimately depend on your individual circumstances. No one can tell you the best way to balance your investments, although a Financial Adviser can help you consider your options.
How do you pay tax on interest?
If you earn more in interest than the Personal Savings Allowance, HMRC will update your tax code (if you’re employed or receiving a pension). If you’re self-employed, you need to declare your earnings via a Self Assessment tax return.
How much in savings can I have before paying tax in the UK?
In the UK, you pay tax on savings interest, not the balance of your deposits. Savings interest is considered income above set thresholds. But ISAs allow you to save £20,000 tax-free every year.
How much interest can you earn tax free?
It depends on your circumstances and the AER (Annual Equivalent Rate) in your savings accounts. But assuming your earnings are below the higher rate of tax (£50,271), and you have maxed out your ISA contributions for the first time within one year, at an interest rate of 5%, the maximum you could earn tax-free would be £2,000.
The starting rate for savings and its limitations
There is another form of tax relief called the ‘starting rate for savings’, which technically means you can earn a separate £5,000 in interest. But this only applies to people earning under £17,570.
The ‘starting rate for savings’ does not increase the maximum you can earn before tax. This is because the starting rate tapers downwards as your income increases. For every pound you make between the tax-free allowance (£12,570) and the ceiling beyond which the scheme no longer applies (£17,570), the starting rate reduces in kind.
Building financial resilience beyond the Personal Savings Allowance
Additional-rate taxpayers don’t receive a Personal Savings Allowance, so it’s important to consider all your options when determining how to earn interest.
For significant cash deposits, the amount you can earn in interest in total can more than offset the tax you’ll pay, provided you open high-interest savings accounts. When depositing large sums into savings accounts, it’s important to find competitive rates, and spread your risk across multiple institutions to maximise your FSCS protection.
Build a savings portfolio with high-interest savings accounts
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Build a portfolio of savings options to protect your wealth.
