Are you paying tax on your cash savings?

The personal savings allowance (PSA) lets most people earn up to £1,000 in interest without paying tax on it.

Your personal savings allowance (PSA) is a tax-free allowance that lets you earn interest on your savings without paying tax on that interest. The allowance you get depends on what rate of income tax you pay:

Basic-rate (20%) taxpayers: can earn £1,000 in savings interest per year with no tax
Higher-rate (40%) taxpayers: can earn £500 in savings interest per year with no tax
Additional-rate (45%) taxpayers: £0 – they do not get an allowance.

For example, a higher-rate taxpayer with £12,500 in a savings account with an interest rate of 4% would yield an annual interest of £500, which aligns with the tax-free threshold.

Consequently, should your balance exceed £12,500 in these accounts, there is a potential risk of incurring taxation on the interest earned at the higher rate of 40%. That would need to increase to £25,000 for basic rate taxpayers to generate the £1,000 savings interest required before they also start paying tax on their savings at 20% on any interest received.

It is noteworthy that numerous deposit accounts currently provide interest rates surpassing 4%. As shown in the table below:

Best Easy Access Savings Accounts in the UK

Account Name	Interest Rate	Minimum/Maximum	Link
Chip	4.85%	No Min, Max £1M	Click Me
Virgin Money	4.51%	Min £1, Max £250,000	Click Me
Atom Bank	4.85%	No Min, Max £100,000	Click Me
Leeds B S	4.4%	Min £1,000m Max £1M	Click Me

ISAs provide an effective means for individuals to mitigate their tax liabilities, allowing them to shelter up to £20,000 annually.

The most important thing to note is that ISA interest doesn't count towards your PSA, so you can earn it tax-free – and still have your full £1,000 (or £500) allowance to use on cash deposit accounts.

Over the past two years, there has been a notable increase in the adoption of ISAs, with many savers potentially having reached their maximum allowance. It is advisable for those who have not yet utilised their ISA allowance to consider doing so, thereby protecting their interest from taxation.

If you have not taken advantage of your ISA allowance this year, please feel free to reach out for a discussion via the Personalised Advice tab on how to avoid unnecessary tax on your savings.