The Personal Savings Allowance (PSA) was introduced by HM Revenue and Customs (HMRC) in 2016 and allows basic rate taxpayers who pay 20% tax to earn up to £1,000 in savings income tax free and higher rate taxpayers who pay 40% tax to have a tax free allowance of £500. Tax payers who pay a rate of 45% are not eligible to receive an allowance.
| Income Tax Band | Personal Savings Allowance |
|---|---|
| Basic rate 20% | Up to £1,000 in savings income is tax-free |
| Higher rate 40% | Up to £500 in savings income is tax-free |
| Additional rate 45% | No Personal Savings Allowance |
How to claim your PSA
No action is required by you. This scheme means that banks and building societies do not deduct tax from your savings interest and all interest is paid gross. This will need to be declared by you if you are eligible to complete a HMRC tax return.
What type of savings income is covered by the PSA?
Savings income includes interest from:
/ Bank and building society accounts.
/ Accounts with providers like credit unions or National Savings and Investments.
/ 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.
Exceeding your personal allowance
If you exceed your personal allowance you will be required to pay tax on the interest that you earn. HMRC will collect payment by adjusting your tax code through self-assessment where applicable.
Tax on your investment bond
Due to the PSA, interest is paid gross on your fixed rate bond. If you have an existing fixed-rate bond then the interest earned will contribute towards your PSA once the bond matures.
Interest is calculated up to the day before the maturity date. Interest is only paid out on the maturity date of your Bond. Where the maturity date is a non-working day interest will be paid on the next working day. For Bonds with a term of more than 1 year interest is compounded annually.
You will start to earn interest as soon as you have completed your online application and we have received your funds. Alternatively, if you are making your deposit by cheque you will start to earn interest as soon as your cheque has cleared. You will continue to earn interest up to, but not including, the maturity date.
