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Why Your Personal Savings Allowance Matters More This Year Than Last

Written by Suffolk Building Society

28 Mar 2024

6 min read

Introduced by the government in 2016, the Personal Savings Allowance (PSA) lets most people earn up to £1,000 in interest on their savings each tax year (between 6 April in any given year and 5 April the following year) without having to pay tax on that interest.

There are two main reasons why your PSA matters more now than ever:

  1. Higher interest rates
  2. Fiscal drag (if you’re not familiar with this term, read on and we’ll explain)

Before we discuss these in more detail, here’s a brief overview of what the personal savings allowance is and how it works:

The PSA covers the interest that you may earn from a number of different sources. For most people, this includes current accounts and savings accounts.

Dividend income from shares or funds is not included in the allowance, nor is interest from Individual Savings Accounts (ISAs) or National Savings & Investments (NS&I) .

What is the Personal Savings Allowance for 2024/25?

Your PSA depends on your income tax band . You can work out your tax band by combining all the interest you receive over the year with any other income you have:

  • Basic rate (20%) taxpayers can earn £1,000 in savings interest per year with no tax deducted
  • Higher rate (40%) taxpayers can earn £500 in savings interest per year with no tax deducted
  • Additional rate (45%) taxpayers do not get an allowance

What happens if you exceed your Personal Savings Allowance?

Savings providers are required to let HMRC know how much interest they pay you each year so HMRC will know if you have exceeded your allowance. If you’re employed, HMRC will automatically collect the amount you owe through PAYE via a change in your tax code.

Alternatively, if you’re self-employed and your savings interest exceeds your PSA, this needs to be declared on your self-assessment tax return. HMRC will then look at your earnings and advise if you need to pay any tax. You’ll be charged income tax at your usual rate if you exceed your PSA.

Check if you have reached your Personal Savings Allowance limit

With interest rates remaining high at the time of writing, many people are enjoying higher returns on their savings than have been available in recent years. However, along with higher interest rates there has been higher inflation and a cost-of-living crisis. Higher pay rises have been awarded to help offset inflation, and the effect of this is that more people have moved into higher-rate tax brackets . (At the time of writing, the 20% basic-rate income tax begins at £12,571, while the higher 40% rate starts at £50,271.) However, because tax thresholds have been frozen since 2021, people’s taxable income has increased without nominal tax rates actually rising. The result of this is increased revenue to the government – a phenomenon known as ‘fiscal drag’.

Taking all of these factors into account, this year, for the first time since the PSA was introduced, more people may exceed their allowance than have done so previously. This is especially the case for people who decided against saving in ISAs or NS&I in recent years because there were better interest rates available on non-ISA accounts.

Although ISAs have changed somewhat over the years, they have remained a tax-efficient way to save, since their introduction in 1999.

Given interest rates are still high and the PSA reflects the interest earned over the entire tax year, if you have sizeable savings, you may run the risk of exceeding your PSA this year and having to pay tax. It would only take non-ISA savings of just over £10,000 to exceed the PSA limit this year for a higher-rate taxpayer if those savings were held in an account earning 5% interest or more.

This doesn’t just affect those who have saved throughout their lives. For example, a first-time buyer who is scrimping and saving to get that all-important mortgage deposit together could have £20,000 set aside in a savings account. If that was held in an account paying 5% or more, even as a basic rate taxpayer, the individual would exceed their PSA.

Is it still worth having a Cash ISA?

As Cash ISAs are tax-free savings accounts, any interest you earn will not count towards your PSA, so they may be a more prudent option for savers while interest rates remain high. Plus, if you’re an additional rate taxpayer and aren’t entitled to the PSA at all, saving in an ISA can help to minimise the tax you owe.

Unfortunately, you can’t backdate your ISA allowance so if you chose not to invest in an ISA during the previous tax year or the year before, you can’t make up for it now. Whatever you invest in an ISA this year, counts towards this year’s allowance which can’t exceed £20,000 .

Bearing all this in mind, it’s important to consider the different types of savings accounts available, so you can find the right option for you and your savings goals.

And don’t forget to check whether you might exceed your PSA this year.

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