A little known tax rule is quietly costing millions of savers money. Tina Hughes, Director of Savings
at Yorkshire Building Society explains how the Personal Savings Allowance works.
If you’ve ever wondered how much interest you can earn on your savings before the taxman gets involved, the Personal Savings Allowance, or PSA, is the rule that decides it. The trouble is, lots of people either haven’t heard of it or aren’t sure how it works – and that lack of awareness is costing savers billions.
Here’s a simple breakdown of what the PSA is, who it impacts, and why understanding it really matters today.
So… what exactly is the PSA?
The PSA is the amount of interest you can earn on your savings each year without paying tax.
How much you get depends on the income tax band you fall into:
- Basic‑rate taxpayers can earn up to £1,000 of interest tax‑free.
- Higher‑rate taxpayers can earn up to £500 tax‑free.
- Additional‑rate taxpayers don’t get an allowance at all.
These thresholds haven’t changed since 2016, even though interest rates and living costs have changed dramatically during that time.
Who does it impact?
In short: millions of everyday savers.
The PSA was originally designed so most people wouldn’t pay any tax on their interest. Back then, interest rates were very low, so earning more than the allowance was unlikely.
But things look very different today:
- With higher interest rates, people reach their PSA much faster than before.
- Someone on the basic rate could once save around £100,000 without exceeding their allowance – today, at current interest levels, it’s closer to £33,000.
- More people are being pushed into higher tax bands due to frozen income tax thresholds, which instantly halves their PSA.
- Since 2016, there are 2.1 million higher‑rate taxpayers, and that number is expected to keep rising.
This means many savers – including those who consider themselves “ordinary” or “just getting by” – are now unexpectedly paying tax on their interest.
Why should you care?
Three big reasons:
1. You could be eligible to pay tax without realising it
By the end of this tax year, savers will have paid £28 billion in tax on their interest since the PSA was introduced – including £4.7 billion from basic‑rate taxpayers alone. Many don’t realise they’re over the allowance until after the tax bill is due.
2. Most people don’t understand the rules
More than half of people don’t know what PSA is. More than a third have never heard of it, and even among those who think they understand it, confidence is shaky. Only 31% would know what to do if they went over their allowance.
3. Fewer tax‑free options are coming
From 2027, the amount people under 65 can put into a Cash ISA will drop from £20,000 to £12,000 – meaning less opportunity to keep interest protected from tax.
The bottom line
The PSA might not be something you think about every day, but it now affects far more people than it used to. Knowing how much interest you’re earning, and how close you are to your limit, could save you from a surprise tax bill.
