The Personal Savings Allowance (PSA) was launched on 6 April 2016. The allowance means that the first £1,000 interest on savings income for basic rate taxpayers is tax-free. For higher-rate taxpayers the PSA is £500. Anyone earning over £150,000 does not benefit from the new PSA.
In addition, any taxpayers whose total taxable income is less than £17,500 won’t pay tax on any savings income. This is made up of 3 elements, the personal allowance for 2017-18 of £11,500, the £5,000 savings starting rate and the £1,000 PSA.
Interest from savings products such as ISAs and ‘premium bond wins’ do not count towards the limit. A basic-rate taxpayer with ISA interest and premium bond wins can still benefit in full from the relevant PSA limits.
Savings income covered under the PSA includes account interest earned from bank and building society accounts as well as accounts with other providers such as credit unions or National Savings and Investments.
Since the introduction of the PSA, banks and building societies no longer deduct tax from your account interest as a matter of course. Given this allowance and the current low savings interest rates, the vast majority of taxpayers are no longer required to pay tax on their savings income.
Taxpayers who still need to pay tax on savings income need to declare this as part of their annual Self Assessment tax return.