Tax Glossary

Personal Savings Allowance (PSA)

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Last updated on:
March 17, 2024

The Personal Savings Allowance (PSA) is a beneficial tax relief for individuals earning interest from savings accounts, Bonds, or peer-to-peer (P2P) lending. It specifies the amount of interest income you can earn each year without needing to pay tax on it. The PSA amount varies based on your total income and associated tax bracket.

Allowance Amounts Based on Tax Brackets

  • Basic Rate Taxpayers (20% tax rate): If your annual income is below £50,270, you're entitled to a PSA of £1,000. This means the first £1,000 of your savings interest is tax-free.
  • Example: Earning £20,000 annually and receiving £250 in interest will not attract any tax since it's under the £1,000 threshold. However, if the interest were £1,500, tax would be due on £500 at the basic rate.
  • Higher Rate Taxpayers (40% tax rate): Those earning above £50,270 have a reduced PSA of £500. Interest earned beyond this amount will be taxed at the higher rate.
  • Additional Rate Taxpayers (45% tax rate): Earners above £125,140 receive no PSA, meaning all interest income is subject to tax at their respective rate.

Exemptions and Reporting

  • Interest from ISAs and certain investment bonds is always tax-free, regardless of the PSA.
  • For employed individuals, HMRC adjusts your tax code to account for any tax due on interest income, directly deducting it from your salary.
  • Self-employed individuals must report interest income on their Self Assessment tax return.

Overpaid Tax on Interest Income

If you believe you've overpaid tax on your savings interest, you can reclaim it using form R40. It's important to monitor your interest income and tax deductions closely to ensure you're paying the correct amount and to take advantage of any potential refunds.

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