As a UK resident, you may be wondering how your savings are taxed and if there's a way to earn interest without having to pay tax on it. Fortunately, the UK government introduced the Personal Savings Allowance, which allows you to earn a certain amount of interest tax-free each year.
In this guide, we'll explain what the Personal Savings Allowance is, what it means for your savings, and how you can make the most of it.
The Personal Savings Allowance is a tax exemption introduced by the UK government to enable individuals to earn interest on their savings without being taxed on it.
The amount of interest you can earn tax-free depends on your tax bracket. As of the current tax year, there are three tax bands:
The Personal Savings Allowance covers various types of savings interest, including interest earned from:
It's important to note that dividends from shares and other investments are not considered savings interest and are subject to different tax rules.
The Personal Savings Allowance applies to your total savings interest earned in a tax year, which runs from April 6th to April 5th of the following year. The threshold depends on your tax bracket:
For example, if you are a basic rate taxpayer and earn £800 in interest within a tax year, you won't have to pay any tax on it. However, if you earn £1,200, the excess £200 will be subject to tax. See our interest rates calculator.
It's important to remember that the tax year you're taxed on your savings interest is based on when you can access the funds and not when they were earned. For example, if you earned interest in March but couldn't access it until April, it would be taxed in the following tax year.
The Personal Savings Allowance offers a great opportunity for UK residents to earn tax-free interest on their savings. By understanding the tax bands and thresholds, you can make the most of your savings and potentially keep more of your hard-earned money. Remember to consult with a financial advisor or HM Revenue and Customs (HMRC) for personalised advice and stay informed about any changes to the tax laws.
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