Personal Savings Allowance - PSA
(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)
The Personal Savings Allowance (PSA) is the amount of interest you can earn on your savings each year before you have to pay tax on it.
The allowance you get depends on your income tax band:
Basic rate taxpayers: £1,000 per year.
Higher rate taxpayers: £500 per year.
Additional rate taxpayers: £0 (no allowance).
Currently, anything over this allowance is taxed as income, so:
20% in the basic rate band,
40% in the higher rate and
45% in the additional rate.
If you are a basic rate taxpayer then, and earn £1,200 in savings interest in a year, the first £1,000 is tax-free and the remaining £200 will be charged at 20%, so you'll pay £40.
From April 2027 however, whilst the PSA stays the same, the tax rates will increase by 2% to 22%, 42% and 47% respectively.
The banks generally report this directly to HMRC so if you are PAYE and your total savings and investment income is less than £10,000 a year, you don't have to do anything. Otherwise you'll want to make sure it's on your self assessment.
Anything within an ISA is not included in this calculation - they're totally tax-free.
Love Eleanor. xxx
