Personal savings allowance

From 6 April 2016, basic rate taxpayers can earn up to £1,000 in savings income tax-free. Higher rate taxpayers can earn up to £500. These are called the Personal Savings Allowance.

Savings income includes account 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.

You can see examples at ACCA's UK technical advice and support pages. 

In the following examples the following limits are assumed:

Personal allowance                                      £11,000

Basic rate limit                                              £32,000

Higher rate threshold                                    £43,000

Example 1

Mr X has salary income of £20,000 and received £1,500 interest for the year.

Salary                                                            20,000

Interest received                                              1,500

                                                                       21,500

Personal allowance                                       (11,000)

                                                                        10,500

Personal savings allowance                            (1,000)

Income taxed at 20%                                        9,500

Tax payable £9,500 x 20% = £1,900

Example 2

Mr Y has salary income of £60,000 and received £1,100 interest for the year.

Salary                                                             60,000

Interest received                                               1,100

                                                                        61,100

Personal allowance                                        (11,000)

                                                                         50,100

Personal savings allowance                                (500)

Taxable income                                                49,600

Tax payable

At basic rate on £32,000 x 20%                          6,400

At higher rate on £17,000 x 40%                        6,800

At higher rate on interest of £600 x 40%               240

Total tax payable                                               13.440

HMRC has published a guide on the Personal Savings Allowance.