Tax Optimization

What is your Personal Savings Allowance (PSA)?

#What is the Personal Savings Allowance (PSA)?

The Personal Savings Allowance (PSA) is a tax-free allowance on the interest you earn from savings. It allows most people in the UK to earn a certain amount of interest on their savings without having to pay income tax on it.

#How Much Is the PSA?

The amount of PSA you’re entitled to depends on your income tax band:

  • Basic-rate taxpayers (20%) can earn up to £1,000 of interest tax-free.
  • Higher-rate taxpayers (40%) can earn up to £500 of interest tax-free.
  • Additional-rate taxpayers (45%) receive no PSA.

#What Counts Towards Your PSA?

Interest earned on:

  • Bank and building society savings accounts
  • Credit union accounts
  • Unit trusts and investment trusts
  • Peer-to-peer lending
  • Corporate bonds

What Doesn’t Count Towards Your PSA:

  • ISA interest (already tax-free)
  • NS&I Premium Bonds prizes (these are tax-free winnings, not interest)
  • Some Government bonds, depending on how they’re structured (e.g., certain gilts and savings certificates)

#Example

If you’re a basic-rate taxpayer and you earn £800 in interest from your bank savings account, you won’t pay any tax on that interest. But if you earn £1,200, you’ll only pay tax on the £200 that exceeds your PSA.

#Strategies to Maximize Your PSA

  1. Split Savings Across Accounts: Spread your savings to ensure interest doesn’t exceed your PSA in one place.
  2. Use ISAs Wisely: Since ISA interest is tax-free and doesn’t count towards your PSA, use it strategically if you’re nearing your allowance.
  3. Monitor Your Tax Band: If a pay rise bumps you into a higher tax bracket, your PSA could shrink, so consider how your savings strategy might need to change.
  4. Review Interest Rates: Use high-interest accounts to get the most from your allowance, especially if you’re within the £1,000 or £500 cap.

#Final Thoughts

The PSA is a simple but powerful tool to earn interest tax-free. By knowing your allowance and managing your savings accordingly, you can avoid unnecessary tax and make your money work harder for you.