Your PSA depends on your income. The table below outlines the Personal Savings Allowance that is given for each income tax band.

The interest you receive is normally paid automatically into your savings account. If you earn any interest that exceeds the personal allowance, then some tax will be owed on that money to HMRC and this can be paid through your tax code.

No matter where your savings interest comes from, the PSA applies. It applies to a wide variety of sources of savings income, including interest earned on non-ISA savings accounts and regular current accounts.

The PSA also extends to income from corporate bonds and government bonds, unit trusts, open-ended investment companies, investment trusts, trust funds, and even life annuity payments. Also, don’t forget that savings income from Individual Savings Accounts (ISAs) is already tax-free, so it doesn’t count towards your allowance.

If you’re employed and you exceed your personal allowance, there is nothing you need to do yourself. Your bank will directly inform HMRC about the interest earned on your savings account and the tax owed be paid automatically through ‘pay-as-you-earn' (PAYE). If your income tax band and the size of your allowance needs to change, that will be automatic, too.

If you're self-employed with interest income from non-ISA savings that exceeds your PSA, you’ll need to make sure that it’s declared on your self-assessment tax return. HMRC will then look at your earnings and let you know if you need to pay any tax and how to go about it. If you exceed your PSA, you’ll be charged income tax at your regular rate.

Over the past year, interest rates have remained at the highest levels for a decade. This could cause some savers to exceed their allowance. We’ve included some examples below¹;

• The best rate for a one-year savings bond in Autumn 2022 was 1.10%. A basic tax-rate payer would need £91,000 across all funds held in non-ISA accounts to exceed their PSA.
• By comparison, the best rate in Autumn 2023 was 5%, meaning the same saver would go over the threshold if balances across all funds held in non-ISA accounts is more than £20,000.

Here’s an example of the PSA in effect:

Sarah is employed and pays the basic income rate. Her savings account has £30,000 sitting in it on a fixed interest rate of 4%, so how much is she saving and how much does she owe in tax after one year?

After 12 months, Sarah has earned £1,200 in interest on the £30,000 she has saved. The PSA for those on basic rate income tax is £1000. Therefore, £200 falls outside of the allowance and is subject to that basic income tax rate. HMRC will change Sarah’s tax code in order for the tax due on the £200 interest to be collected through her salary automatically.

There are still huge benefits to having a cash ISA. You can currently save up to £20,000 tax-free each year, and the money doesn’t count towards your PSA.

Remember to complete an ISA transfer form when you move funds to keep your money tax free. Otherwise you'll lose it's tax free status and the balance will count towards your PSA.