Personal Savings Allowance can significantly impact the tax-free interest you can earn on your savings, but what exactly is it, and how does it work?
In this guide, we’ll delve into Personal Savings Allowance and how it might affect you.
So, what is the Personal Savings Allowance?
In simple terms, the Personal Savings Allowance (PSA) is the amount of tax-free interest that your savings account can accumulate over the course of a tax year. This tax year typically spans from the 6th of April to the 5th of April the following year. The PSA applies to all your savings accounts except for Individual Savings Accounts (ISAs).
Unlocking Tax-Free Interest with Personal Savings Allowance
Imagine earning interest on your savings without having to worry about parting with a portion of it in taxes. The PSA makes this possible by allowing you to earn a certain amount of interest without any tax implications. It’s important to note that this tax-free interest is applicable to all your savings accounts that aren’t ISAs.
What’s the difference between Personal Savings Allowance and ISA Allowance?
Remember, your Personal Savings Allowance is different from an ISA allowance.
Your ISA allowance refers specifically to the amount you can invest in ISAs, which have their own limits for tax-free savings. While both might seem like mechanisms to maximise your savings, they operate differently, meaning that any interest earned in an ISA doesn’t count towards your PSA.
Now, the amount of PSA you get depends on what kind of taxpayer you are. Don’t worry, it’s not as complicated as it sounds.
There are three types:
Basic Rate Taxpayers (20%): If you fall under the basic rate taxpayer category, you’re entitled to a PSA of up to £1,000 in tax-free interest each tax year. This means that the interest you earn on your savings up to this threshold will not be subject to taxation.
Higher Rate Taxpayers (40%): For those categorised as higher rate taxpayers, the PSA is slightly reduced. You can earn up to £500 in tax-free interest annually. This is an important consideration for individuals who fall within the higher income brackets.
Additional Rate Taxpayers (45%): Unfortunately, if you’re an additional rate taxpayer, you won’t benefit from a Personal Savings Allowance. This means that all the interest you earn on your savings will be subject to taxation at the higher rate of 45%.
Putting it all together
In a nutshell, the Personal Savings Allowance is like a gift from the government that lets you earn interest on your savings without worrying about taxes up to a certain amount. So, if you’re a basic or higher rate taxpayer, you can give your savings a chance to grow even more. Just keep an eye on those dates and make the most of your tax-free earnings!
And, if you’re ever in doubt, a chat with one of our savings specialists or a financial advisor can be like having a friendly translator by your side.
If you have any questions, get in contact today.