CMC Invest
20 November 2024
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Important: This article is for general guidance purposes only and should not be considered as financial advice.Tax treatment will depend on your individual circumstances and could potentially change in the future.
Introduced by the government back in 2016, the personal savings allowance is the amount of interest you can earn on your savings before you have to pay tax.
Your personal savings allowance will depend on your income, which includes any earnings from your work, benefits and pensions, or any other income you may have.
Tax band | Taxable income (excluding savings) | Personal Savings Allowance |
|---|---|---|
Non taxpayer | £0 to £12,570 | £1,000 |
Basic rate taxpayer | £12,570 to £50,270 | £1,000 |
Higher rate taxpayer | £50,270 to £125,140 | £500 |
Additional rate taxpayer | Over £125,140 | No personal savings allowance |
If your income is below £12,570, then you may be able to receive up to £5,000 in tax-free interest. For every £1 you earn above the income allowance threshold of £12,570, the amount of tax-free interest you can earn is reduced by £1. For more information, visit gov.uk.
The allowance includes any interest earned in standard cash savings accounts and fixed savers, government and company bonds, as well as trust funds.
It’s important to note that up to £20,000 placed in ISAs per annual tax year, including cash ISAs and stocks and shares ISAs, is tax-free and so doesn’t impact your personal savings allowance.
When you invest, your capital is at risk (applicable to Stocks & Shares ISA).
This is going to depend on where exactly you’ve put your money, and at what rate you are earning. For example, if we assume your money is in a fixed savings account offering 4% annual equivalent rate (AER), here’s how much you’ll be able to save before having to pay tax:
Basic rate payer | Higher rate payer | Additional rate payer |
|---|---|---|
£25,000 | £12,500 | N/A |
For more information about the difference between gross interest and AER, click here.
If you save your money in a Cash ISA, you can contribute up to £20,000 per annual tax year and you won’t need to tax on any interest earned, regardless of if you are a basic, higher or additional rate payer.
It’s a legal requirement to declare and pay any tax owed.
If you’re employed or are receiving a pension, HMRC should automatically collect any tax you owe through your Pay as You Earn (PAYE) tax code.
If you’re self-employed, then it’s your responsibility to declare the untaxed interest earned on your self-assessment tax return.
If you have enough savings and expect to earn more than your personal savings allowance in a single tax year, then you could consider a cash ISA alongside a savings account.
Even if you don’t have enough to reach the limit of your personal savings allowance, opening a cash ISA can help you build up a tax-free nest egg. Find out more about how a cash ISA works.
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