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From 6 January 2024, the main rate of class 1 National Insurance contributions (NIC) deducted from employees’ wages is reduced from 12% to 10%. From 6 April 2024, the main rate of self-employed class 4 NIC will reduce from 9% to 8% and class 2 NIC will no longer be due. Those with profits below £6,725 a year can continue to pay class 2 NIC to keep their entitlement to certain state benefits. Our guidance will be updated in full in spring 2024.

Updated on 6 April 2023

Personal savings allowance

The personal savings allowance is a nil-rate band of tax which applies to taxable savings income. It is £1,000 for most basic-rate taxpayers. The savings income that falls within the personal savings allowance is taxed at 0%. 

Content on this page:

What the personal savings allowance is

As we explain on our page Tax on savings interest, the personal savings allowance is one of three main allowances and nil-rate bands which can apply to savings income.

The personal savings allowance applies after the personal allowance and the starting rate for savings, so when you are working out whether you owe tax on your savings income you should consider these first.

The personal savings allowance does not reduce the amount of your taxable income, nor is savings income falling within it ‘exempt’ from tax. Instead, it is a nil rate band of tax for savings income.

This means that income that is covered by your personal savings allowance still counts as taxable income and therefore still uses up your basic rate band or your higher rate band of tax.

This can affect the rate of tax you pay on savings income that exceeds your personal savings allowance, the rate of tax you pay on dividend income, and the level of the personal savings allowance you can get - see the heading below: Amount of the personal savings allowance.

The following example shows how the personal savings allowance works in a basic scenario.

Example: Henry – personal savings allowance

In the 2023/24 tax year, Henry earns £25,000 and has savings income of £600. He has to pay tax at 20% on £12,430 of his earnings (the amount left once his £12,570 personal allowance is used). However, his savings income is tax free due to his £1,000 personal savings allowance.

If his savings income was £1,250 instead of £600, he would have 20% tax to pay on £250 (£50).

As tax is not collected at source on interest, he will have to pay this £50 to HMRC another way – most likely by having his PAYE tax code adjusted.

Amount of the personal savings allowance

Generally, if your total adjusted net income is less than £50,270 (for 2023/24) then you will have a personal savings allowance of £1,000. Adjusted net income is your total taxable income less certain deductions like gross gift aid contributions or gross pension contributions.

Strictly, to work out the amount of your personal savings allowance, you need to determine whether or not you have any income which is charged to tax at the higher rate (or additional rate). In considering this question, you must ignore all the following:

If you then do not have any income which is charged to tax at the higher rate (or upper dividend rate), the amount of the personal savings allowance is £1,000. This will always be the case if you are eligible for the standard personal allowance and your total taxable income is less than £50,270 (for 2023/24). You need to include in the calculation of total taxable income any savings income taxable at a nil rate because of the personal savings allowance, and any dividend income taxable at a nil rate because of the dividend allowance.

If you have income which is charged to tax at the higher rate or upper dividend rate (or would have been, ignoring the personal savings allowance, dividend allowance, and whether you are a Scottish or Welsh taxpayer), and not the additional rate or additional dividend rate, then your personal savings allowance is £500. 

Example: John and James – income level

John (not a Scottish taxpayer) has total income of £50,271 in 2023/24. Of this, £1,000 is savings interest. Since his total income means that he is a higher rate taxpayer, he is entitled to a personal savings allowance of £500.

His savings income is taxed as follows:

£500 @ 0% = £0

£499 @ 20% = £99.80

£1 @ 40% = £0.40

Total tax on savings interest of £100.20

James (not a Scottish taxpayer) has total income of £50,270 in 2023/24. Of this, £1,000 is savings interest. Since his total income means that he is a basic rate taxpayer, he is entitled to a savings allowance of £1,000.

His savings income is taxed as follows:

£1,000 @ 0% = £0

Total tax on savings interest of £0

Thus, a £1 increase in income produces an additional tax liability of £100.20.

The following example shows how the personal savings allowance is calculated and how the amount of income covered by the personal savings allowance still uses up a person’s basic rate band.

Example: Magda – basic rate band

Magda (who is not a Scottish taxpayer) has earnings of £48,650 and savings income of £1,750 in 2023/24. She has to pay tax at 20% on £36,080 of her earnings (the amount left once her £12,570 personal allowance is used). After her earnings are taken into consideration, she has £1,620 left in her basic rate band.

To work out how much her personal savings allowance is and how much tax she has to pay on her savings income, she needs to first work out her ‘adjusted net income’. Her adjusted net income is her total income less any reliefs. She has not made any pension contributions or any Gift Aid donations, so her adjusted net income is £50,400 (earnings of £48,650 plus her savings income of £1,750). As her adjusted net income is more than £50,270, her personal savings allowance is £500.

Although £500 of her savings income is tax free due to the personal savings allowance, it uses up some of her basic rate band, meaning only £1,120 of her remaining savings income (of £1,250) can be taxed at 20% – tax of £224. This means that she has to pay 40% on £130 – tax of £52. As tax is not collected at source on interest, she has to pay this total of £276 tax (£224 + £52) to HMRC another way.

If you have income which is charged to tax at the additional rate or additional dividend rate, then you are not eligible for a personal savings allowance.

Application of personal savings allowance

The personal savings allowance applies to savings income. For examples of the types of income included see our page Tax on savings and investments.

Bank account ‘rewards’

The personal savings allowance applies only to savings income as defined by law. This means that even if you receive income that you think of as savings income, if it is not within the definition, it is not eligible for the personal savings allowance. Equally, it is not eligible for the starting rate of savings.

The situation can be very confusing in relation to certain types of ‘reward’ accounts which banks may offer. If you receive any interest (whether on the reward account or on a different account), you should receive that gross and it will be eligible for the personal savings allowance. The treatment of ‘rewards’ however depends on the nature of the reward. It is very possible that you will receive the reward net of 20% tax; in addition, the reward may not be eligible for the personal savings allowance. There is often limited guidance available from the bank, and the nature of the reward can vary from account to account.

Please note that we are talking about regular cash rewards here as opposed to cash incentives for people switching their accounts or cashback on certain types of spending, which are generally not taxable as they are considered a 'discount' rather than a reward.

If you have a reward account, to check the tax position, you need to find out the following information:

  • the type of reward;
  • whether the bank pays you the reward gross or net of tax (and if net, how much tax is deducted at source);
  • whether the reward is taxable income; and
  • whether the reward is potentially eligible for the personal savings allowance, depending on your circumstances.

There are three main possible tax treatments, depending on the type of reward:

  1. If the reward takes the form of interest (that is, a rate based on the account balance), it is savings income and eligible for the personal savings allowance. Banks should pay this to you gross without deducting 20% tax at source, but it is still taxable income.
  2. If the reward takes the form of a cash reward (not related to the account balance), for say depositing a certain amount per month, this is not savings income, but is probably an ‘annual payment’ (applicable even if the reward is paid monthly). Banks must deduct tax at 20% before paying you the cash reward, and the gross amount of the cash reward is taxable. Since annual payments are not savings income, these types of reward are not eligible for the personal savings allowance (or the starting rate for savings). If you are not liable to tax you can reclaim any tax deducted by completing an R40 form or on your self assessment tax return. If you are a higher-rate taxpayer you would need to pay the extra amount to HMRC, for example, via a PAYE coding adjustment or through your tax return.
  3. If the reward takes the form of a cash reward (not related to the account balance) and there is a fee for the account, the reward does not meet the conditions for an annual payment. It is still taxable, however as a 'miscellaneous payment'. Banks do not have to deduct tax before paying you the cash reward, so you receive these rewards gross and the gross amount is taxable. These types of reward are not savings income, so they are not eligible for the personal savings allowance (or the starting rate for savings). If you are a basic, higher-rate or additional-rate taxpayer you would need to pay any tax due to HMRC, for example, via a PAYE coding adjustment or through your tax return.

Cash ISAs

If you have a cash individual savings account (ISA), the interest you get is tax free. ISA income does not count towards the PSA.

NS&I products

There are also a number of NS&I products, which are expressly free of tax, for example, fixed interest and index-linked National Savings Certificates and Premium Bonds. Income or prizes from these products do not count towards the PSA either.

You can find more information about NS&I products from NS&I.

Joint accounts

Where you earn interest on joint accounts, both account holders are entitled to a personal savings allowance, to use against their share of the interest.

Further examples

The below examples demonstrate how the personal savings allowance works in a variety of scenarios.

We start by looking at how the personal savings allowance interacts with the starting rate for savings.

Example: Interaction of the starting rate for savings and personal savings allowance

We outline various scenarios below which show how the application of savings tax rates can change depending on income level.

Scenario A: starting rate for savings only

In 2023/24, Mo has pension income of £14,000 and savings income of £1,500. He has to pay tax at 20% on £1,430 of his pension income (the amount left once his £12,570 personal allowance is used).

He does not have to pay any tax on his savings income, because it all falls within the starting rate for savings band – his total income is less than £17,570. Mo does not need to use his personal savings allowance.

Scenario B: starting rate for savings and partial use of the personal savings allowance

In 2023/24, Mo has pension income of £14,000 and savings income of £3,650. He has to pay tax at 20% on £1,430 of his pension income (the amount left once his £12,570 personal allowance is used).

He does not have to pay any tax on his savings income, because £3,570 would fall within the starting rate for savings band and the remaining £80 would fall within his personal savings allowance.

Scenario C: full use of the starting rate for savings and the personal savings allowance

In 2023/24, Mo has pension income of £14,000 and savings income of £4,650. He has to pay tax at 20% on £1,430 of his pension income (the amount left once his £12,570 personal allowance is used).

He has to pay tax at 20% on £80 of his savings income. Of the £4,650 total, the first £3,570 falls within the starting rate for savings band; the next £1,000 falls within the personal savings allowance; and the remaining £80 is taxable at 20%. As tax is not collected at source on interest, he will have to pay this £16 tax to HMRC another way.

Scenario D: pension income level means the starting rate for savings is unavailable

In 2023/24, Mo has pension income of £18,000 and savings income of £1,500.

The starting rate for savings band would not be available to him at all, because his pension income has exceeded his personal allowance of £12,570 plus the starting rate for savings band of £5,000 (a total of £17,570). He would therefore have to pay tax at 20% on £500 of his savings income (that is, the amount left over once his £1,000 personal savings allowance has been used).

The next example demonstrates how to work out your tax if your only taxable income is savings income, applying the personal allowance, starting rate for savings and the personal savings allowance.

Example: savings income only

Richard has £18,900 of savings income in 2023/24 and no earned income. His tax will be worked out as follows:

 

£

Savings income (gross)

18,900

Minus: personal allowance

-12,570

Income on which tax is charged

6,330

Richard has no earned income and he has not used up any of his starting rate for savings tax band so he will be taxed up to the limit of £5,000 at 0%. The next £1,000 will fall within his personal savings allowance of £1,000 and also be taxed at the rate of 0%. The balance of £330 will be taxed at the 20% basic rate.

 

£

£5,000 @ 0%

0

£1,000 @ 0%

0

£330 @ 20%

(£6,330 taxable savings income, minus £5,000 starting rate for savings band, minus £1,000 personal savings allowance)

66

Tax due

66

Richard will have to make sure that HMRC know that he has savings income on which he will have to pay tax. As Richard does not have any earned income, HMRC will have to collect the tax through a direct demand for payment (simple assessment) or through self assessment, by asking Richard to complete a tax return.

We now look at three different examples of taxpayers with both earnings and savings income. These examples demonstrate how to work out your tax if your taxable income is both earned income and savings income, applying the personal allowance, starting rate for savings and the personal savings allowance.

Example: starting rate for savings unavailable

Gerry has earnings of £17,700 and savings income of £1,200. His earned income is more than the upper limit of £17,570, which is the personal allowance of £12,570 plus the starting rate band of £5,000. So, £1,000 of his savings income falls within his personal savings allowance and is taxed at 0%. He is taxed on the balance of £200 savings at the 20% basic rate. His tax will be worked out as follows:

 

£

Earned income

17,700

Savings income (gross)

1,200

Minus: personal allowance

-12,570

Income on which tax is charged

6,330

Tax calculation:

 

Earned income £5,130 @ 20%

1,026

Savings income £1,000 @ 0%

0

Savings income £200 @ 20%

40

Tax due

1,066

Example: starting rate for savings and personal savings allowance available

Amanda has total taxable income of £18,900, made up of £10,900 wages and £8,000 savings interest.

Earned income uses £10,900 of Amanda’s personal allowance of £12,570, leaving £1,670 to go against her savings income. This means only £6,330 of her savings income is liable to tax.

Her tax can be worked out as follows:

 

£

Savings income £5,000 @ 0%

(starting rate for savings)

0

Savings income £1,000 @ 0%

(personal savings allowance)

0

Savings income £330 @ 20%

(£6,330 taxable savings income less £5,000 starting rate for savings band, minus £1,000 personal savings allowance)

66

 

66

Example: starting rate for savings partially available

Michael has total taxable income of £18,900 in 2023/24, made up of £13,100 wages and £5,800 savings.

His tax can be worked out as follows:

 

£

Earned income

13,100

Less: personal allowance

-12,570

Earned income on which tax is charged

530

Tax on earned income @ 20%

106

Of the £5,000 starting rate for savings band, £530 has been used up by the earned income above his personal allowance, so £4,470 remains for Michael to use for his savings income:

 

£

£4,470 @ 0%

(remaining starting rate for savings)

0

£1,000 @ 0%

(personal savings allowance)

0

£330 @ 20%

(£5,800 taxable savings income minus £4,470 remaining starting rate for savings band,
minus £1,000 personal savings allowance)

66

Total tax due (including tax due on earnings above)

172

Further information

There is information about the personal savings allowance, including a simple example on GOV.UK.

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