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Personal Savings

1. Introduction

From 6 April 2016, if youíre a basic rate taxpayer youíll be able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers will be able to earn up to £500. This is called the Personal Savings Allowance.

This means:

  • most people will no longer pay tax on savings interest
  • banks and building societies will stop deducting tax from your account interest

If you already receive interest without tax being taken off, youíll no longer need to tell your bank or building society that you qualify for tax-free interest.

2. What counts as savings income

Savings income includes account interest from:

  • bank and building society accounts
  • accounts with providers like credit unions or National Savings and Investments

It also includes:

  • interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
  • income from government or company bonds
  • most types of purchased life annuity payments

Interest from Individual Savings Accounts (ISAs) doesnít count towards your Personal Savings Allowance because itís already tax-free.

Interest from National Savings and Investments (NS&I) tax-free products, namely Fixed Interest Savings Certificates and Index-linked Savings Certificates; and prizes won from Premium Bonds, also doesnít count towards your Personal Savings Allowance because itís already tax-free.

3. If your taxable income is less than £17,000

If your total taxable income is less than £17,000 you wonít pay tax on any savings income.

4. How much your Personal Savings Allowance will be

The amount of your Personal Savings Allowance depends on your adjusted income.

The table shows your allowance from 6 April 2016, depending on whether youíre a basic, higher or additional rate taxpayer.

Tax rateIncome band (adjusted net income)Personal Savings Allowance
Basic 20%Up to £43,000Up to £1,000 in savings income is tax-free
Higher 40%£43,001 - £150,000Up to £500 in savings income is tax-free
Additional 45%Over £150,000No Personal Savings Allowance

5. Examples: basic rate

5.1 You earn £20,000 a year and get £250 in account interest

You wonít pay any tax on your interest, because itís less than your £1,000 Personal Savings Allowance.

5.2 You earn £20,000 a year and get £1,500 in account interest

You wonít pay tax on your interest up to £1,000. But youíll need to pay basic rate tax (20%) on the £500 interest over your Personal Savings Allowance.

6. Examples: higher rate

6.1 You earn £60,000 a year and get £250 in account interest

You wonít pay any tax on your interest, because itís less than your £500 Personal Savings Allowance.

6.2 You earn £60,000 a year and get £1,100 in account interest.

You wonít pay tax on your interest up to £500. But youíll need to pay higher rate tax (40%) on the £600 interest over your Personal Savings Allowance.

7. What you need to do

You donít need to do anything to claim your Personal Savings Allowance.

If youíre a basic rate taxpayer and have savings income or interest of more than £1,000 (£500 for higher rate taxpayers), youíll have to pay some tax on this. But you donít need to do anything yet.