Since 6 April 2016, banks and building societies are no longer required to deduct income tax from your interest before paying it to you. Instead, your interest is paid to you gross. With the changes, the Personal Saving Allowance was introduced as an addition to the tax-free Saving Rate Band structure. This does not include your Individual Savings Accounts (ISA) as you don’t pay tax on interest earned from an ISA as it is tax free.
Personal Saving Allowance (PSA)
With the introduction of the PSA, the majority of savers in the UK no longer have to pay any tax on their savings income. Your PSA depends on what rate of tax you pay:
| Income Tax Band: | Tax-free Savings Income: |
| Basic-rate – 20% | You will be able to earn £1,000 interest per year with no tax |
| Higher-rate – 40% | You will be able to earn £500 interest per year with no tax |
| Additional-rate – 45% | £0 – you are not eligible to get an allowance |
Let’s Look at an Example:
During the 2021-22 tax year, John received interest of £7,000 and wages of £30,000. He is a basic rate tax payer and will be taxed as follows:
- A personal allowance of £12,570 is applied to his non-savings income reducing his taxable non-savings to £17,430. This is subject to tax at 20%.
- The first £1,000 of interest is covered by his personal savings allowance.
- The remaining interest of £6,000 is subject to tax at 20%
Savings covered by your allowance
- bank and building society accounts
- savings and credit union accounts
- unit trusts, investment trusts and open-ended investment companies
- peer-to-peer lending
- trust funds
- payment protection insurance (PPI)
Your allowance also applies to interest from
- government or company bonds
- life annuity payments
- some life insurance contracts
The 0% ‘Starting Rate’ Band (SRB):
In addition to the savings nil rate, a 0% starting rate applies for interest income in 2021/22, but only where taxable non-savings income (income after your personal allowance has been deducted) is less than £5,000.
This usually benefits lower income/ part-time workers, as the more you earn from non-savings income such as wages, the less your SRB will be. As soon as your non-savings income exceeds £17,570, you will not be eligible for this allowance, as the SRB reduces for every £1 you earn over the personal allowance (2021-22: £12,570).
So, if you have received a wage of £16,000 and interest (excluding ISAs) of £3,500, £12,570 of your wages will be covered by your personal allowance leaving you with £3,430 which will be taxed at 20%. £1,570 of interest will be covered by your starting rate band (£5,000 less £3,430) and will be subject to tax at 0%. A further £1,000 of interest will be taxed at the nil rate, leaving just £930 (£3,500 – £1,570 – £1,000) subject to tax at 20%.
Individual Savings Allowance (ISAs):
ISAs is a tax-free savings account for qualifying individuals. All interest and dividends received, and capital gains made from these accounts are tax free.
Investment made into a ISAs account is subject to the following limits:
| Annual limits: | £20,000 |
| Junior ISA annual limit: | £4,368 |
| Lifetime ISA annual limit: | £4,000 |
| Help to buy ISA monthly limit: | £200 |
If you need any help submitting your self-assessment tax return, feel free to create an account on TaxDash and complete all your personal as well as income details. Our qualified accountants will ensure you file your tax returns quickly, accurately, and efficiently.