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Personal Savings Allowance – Are you over the threshold?

Personal Savings Allowance – Are you over the threshold?

Now that we’re halfway through the 2024/25 tax year, it’s important to take a look at your savings and the interest they are generating. One aspect that may sometimes be overlooked is the Personal Savings Allowance (PSA). This allowance determines how much interest you can earn on your savings before being liable to pay any tax. If you’ve exceeded this threshold, you must declare the interest to HMRC to avoid penalties.

What is the Personal Savings Allowance?

The Personal Savings Allowance was introduced in 2016 to allow individuals to earn tax-free interest on their savings. The allowance you receive depends on your income tax band:

  • Basic rate taxpayers (earning between £17,570 and £50,270) can earn up to £1,000 of interest tax-free.
  • Higher rate taxpayers (earning between £50,721 and £125,140) can earn up to £500 of interest tax-free.
  • Additional rate taxpayers (earning over £125,140) do not receive a PSA and must pay tax on all savings interest.

This means that any interest earned above these limits is subject to tax and must be declared to HMRC.

Why you should check your interest earnings

Interest rates in the UK have risen recently, which is great news for savers, however it also means you might unknowingly exceed your PSA. For example, if you have a combination of savings accounts or fixed-rate savings bonds that are collectively generating interest, it’s essential to monitor how much you are earning.

Even if the interest is slightly above the PSA, you are legally obligated to declare it to HMRC and pay the appropriate tax owed. Ignoring this can result in penalties or interest charges, so it’s crucial to stay on top of your finances.

How to check if you’re over the Personal Savings Allowance threshold

  • Read correspondence from your bank/provider as they should send a statement shortly after the tax year confirming how much interest you have been paid.
  • Check interest rates. Determine how much interest each account has been earning in the current tax year and total up the amount. Even if one account doesn’t seem significant, the combined interest from multiple accounts could push you over your PSA threshold.
  • Track any changes. Interest rates can fluctuate, so keep track of your earnings throughout the year, not just at the end.

Declaring interest to HMRC

If you find that you have earned interest over your PSA, you will need to declare it on your Self Assessment tax return. If you don’t normally complete a tax return, you can contact HMRC to notify them of the interest.

How much tax will you need to pay?

If you earn interest over your PSA then the rate of tax you pay will be the same as your usual rate of income tax. For example, if £1,500 in interest is earnt, then a basic rate taxpayer will owe £100, a higher rate taxpayer will owe £400 and an additional rate taxpayer will owe £675.

Conclusion

If you’re unsure whether you’re over your PSA threshold, please contact your adviser to discuss or bring your paperwork to your annual review meeting.

Our advisers are here to help you with all tax-efficient savings and ensure you’re making the most of your hard-earned money.

Disclaimer

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

Please seek professional advice from one of our advisers before making any financial decisions.

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