Personal Savings Allowance

If you’re a basic rate or higher rate taxpayer, you’re entitled to a Personal Savings Allowance. This means you’ll be able to earn some interest from your savings without paying tax on that interest.

Learn more about how it works, and what this means for you.

Frequently asked questions (FAQs)

What is a Personal Savings Allowance?

On 6 April 2016 the government introduced a Personal Savings Allowance (PSA), meaning many savers won’t pay tax on their savings interest.

The Personal Savings Allowance is the amount of interest that can be earned tax-free and is different depending on what rate of tax you pay. It’s an annual allowance and applies to a tax year. (A tax year runs from 6th April to the 5th April).

Basic rate (20%) taxpayers can earn £1,000 tax-free interest.
Higher rate (40%) taxpayers can earn £500 tax-free interest.
Additional rate (45%) taxpayers do not get an allowance.

How much would I need to save to reach the Personal Savings Allowance limit?

The amount you’d need to save to reach your limit depends on the interest rate of your accounts.

To give you an idea, the table below shows the amount you’d have to save to reach the Personal Savings Allowance limits. Your limit will depend on what rate of tax you pay.

Personal Savings Allowance (PSA) limit £1,000 per year

Amount you'd need to save to reach the PSA limit (based on a 2.50% gross/AER variable instant access account) £40,000

Amount you'd need to save to reach the PSA limit (based on a 4.85% gross/AER fixed rate deposit account) £20,618

Personal Savings Allowance (PSA) limit £500 per year

Amount you'd need to save to reach the PSA limit (based on a 2.50% gross/AER variable instant access account) £20,000

Amount you'd need to save to reach the PSA limit (based on a 4.85% gross/AER fixed rate deposit account) £10,309

Personal Savings Allowance (PSA) limit £0

Amount you'd need to save to reach the PSA limit (based on a 2.50% gross/AER variable instant access account) N/A

Amount you'd need to save to reach the PSA limit (based on a 4.85% gross/AER fixed rate deposit account) N/A

Please note: the table uses fictional savings accounts and is for illustrative purposes only. This assumes:

interest is paid annually and the amount saved is deposited at the beginning of the 12-month period
the interest rate doesn’t change
no withdrawals or additional deposits are made during this period.

Figures are rounded to the nearest pound.

What is covered by the Personal Savings Allowance?

The Personal Savings Allowance applies to any interest you earn from:

Bank and building society accounts
Savings and credit union accounts
Unit trusts, investment trusts and open ended investment companies
Peer to peer lending
Trust funds
Payment protection insurance (PPI)
Government or company bonds
Life annuity payment
Some life insurance contracts.

It also includes interest earned on other currencies that are held in UK based savings accounts, expected profit from sharia accounts, and interest included in financial compensation.

Savings in tax-free accounts like ISAs do not count towards your allowance.

You can learn more about how tax on savings interest works on GOV.UK.

How do I claim the Personal Savings Allowance?

You do not need to do anything to claim your Personal Savings Allowance. Interest is paid straight into your account, and no tax is deducted.

What if I exceed my Personal Savings Allowance?

If the interest you earn exceeds your Personal Savings Allowance and you are an employee, any tax you owe will usually be collected by HM Revenue and Customs (HMRC) through your tax code.

If you complete a self-assessment tax return, you should report any interest earned on your savings.

Do I need an ISA?

It depends on your personal circumstances. If you have a lot of money to save or if interest rates increase, you might end up going over your annual Personal Savings Allowance and end up paying some tax on the interest you earn.

By putting money into an ISA, up to the annual ISA allowance, you get more flexibility as the interest you earn is tax-free, and doesn’t count towards your Personal Savings Allowance. The money you put into an ISA is also protected from tax year after year. You can learn more about ISA allowances in our handy ISA allowance guide.

Other benefits of ISAs:

Spouses can inherit their deceased partner’s ISA, but are not able to inherit their Personal Savings Allowance.
If you’re an additional rate taxpayer and not eligible for a Personal Savings Allowance, you can still earn tax-free interest on your savings.

Please note, interest rates on cash ISAs are usually lower than non-ISA savings accounts. So if you’re not going over your Personal Savings Allowance, then a cash ISA might not be the best option for you.

Find out more about our cash ISAs.

Does the Personal Savings Allowance apply to interest on children’s savings accounts?

Interest on saving accounts for children will be taxed differently, depending on where the savings come from.

If gifts from a parent produce interest of £100 a year or more, the interest is taxed as belonging to the parent and not the child and so it counts towards the parent’s Personal Savings Allowance
If a gift is from a grandparent, other relative or friend, it can usually be taxed as the child’s income and count towards the child’s Personal Savings Allowance regardless of who has funded the account for the child.

You can find out more information about interest on children’s savings accounts on GOV.UK.

What type of savings account is best for me?

To get the savings account best suited to your needs, you should consider what type of saver you are.

Are you saving for the long term or short term? Do you need constant access to your savings or are you able to lock them away for a period of time to earn more interest?

One way of maximising your savings and interest is by finding the right account or combination of savings accounts for you, and adding funds as regularly as you can.

We have plenty of savings accounts suited to different needs: find out more about the different accounts we offer.

See our savings accounts

If you’re considering opening a cash ISA

You cannot pay into a cash ISA with us if you have already paid in the full annual ISA allowance in this tax year.

Savings terms explained

AER stands for Annual Equivalent Rate and shows what the interest rate would be if interest were paid and added to your account each year.

Business day is usually Monday to Friday excluding bank holidays.

Calendar month means from midnight on the first day of a month to 11.59:59pm on the last day of the month.

Fixed interest means the rate stays the same until the account matures.

Gross is the rate of interest payable before any tax is taken off.

Tax-free means you will not pay any tax on your interest.

Tax year runs from 6 April to 5 April.

Variable interest means that it could go up or down.

Please note: any reference to tax is based on our understanding of current tax regulations which may change in the future and depend on the customer's individual financial circumstances.

The Co-operative Bank reserves the right to decline or accept any application and/or deposit.

Financial Services Compensation Scheme

Your eligible deposits held by a UK establishment of The Co-operative Bank plc are protected up to a total of £85,000 by the Financial Services Compensation Scheme, the UK's deposit guarantee scheme. This limit is applied to the total of any deposits you have with The Co-operative Bank and smile. Any total deposits you hold above the limit between these brands are unlikely to be covered.

Please read further information on the FSCS scheme here or visit their website.