4 Ways to Maximise Your Personal Savings Allowance

Your Personal Savings Allowance (PSA) is the interest you can earn on your savings each tax year without paying tax. The amount you can earn depends on your tax bracket, which is worked out by adding your interest to your other income:

• Basic rate taxpayers (20%) – can earn up to £1,000 in tax-free interest
• Higher rate taxpayers (40%) – can earn up to £500 in tax-free interest
• Additional rate taxpayers (45% or higher) – don’t get a PSA

It is not to be confused with your Personal Tax Allowance (the “personal allowance”), which is the amount you can earn in income before paying any income tax. The basic standard Personal Tax allowance is £12,570 in the 2024/25 tax year.

The PSA covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It’s important to note that ISAs are exempt.

Let’s examine four strategies to make the most of your PSA and minimise your tax liability.

1) Know your interest rates

It is essential to be aware of the amount you would need to have in savings to tip you over the allowance, as it may be much less than you anticipate. Don’t just sleepwalk into an unexpected tax bill.

At current savings rates, basic-rate taxpayers would need just over £19,000 in a top-performing easy-access savings account to exceed the allowance.

For example, if a basic-rate taxpayer was getting 5.2% returns on £19,231, that would give them £1000,01, taking them over the limit of their PSA.

An amount of £9,615 with an interest rate of 5.2% would give a higher rate taxpayer £499.82 in interest, almost taking them up to their £500 PSA limit. Additional rate taxpayers wouldn’t get a PSA anyway.

If you had your savings in a fixed 1-year account and were getting a little less interest at 5.15%, the amount you could save as a basic rate taxpayer would be £19,417, generating £999.97 in interest. For a higher rate taxpayer entitled to a £500 PSA, the tax-free savings limit would be £9,709.

With the Bank of England lowering its base rate on 1 August from 5.25% to 5%, interest rates are likely to continue falling. However, stay aware of where you stand in relation to your PSA.

2) Maximise your tax-free savings

Your ISA allowance

Make sure you use your full ISA allowance each tax year. You can save up to £20,000 per tax year in a cash ISA, so the interest won’t count towards your PSA. That means you earn the interest tax-free and still have your £1000 (or £500) allowance.

You can also split your savings across the three different types of ISA: a cash ISA, a stocks and shares ISA or an innovative finance ISA

Changes that came into effect last April also mean that you can invest in more than one type of ISA and chase the best rates with different providers. However, check the terms and conditions before you open an account, as not all banks have embraced the new freedoms.

If you have funds in ISAs that have built up over time, you’re likely to benefit from leaving them where they are, as the interest earned still remains exempt from income tax.

Premium bonds

Another type of tax-free savings is premium bonds. You can hold up to £50,000 tax-free.

Although they don’t pay any interest, you’ll be entered into a prize draw every month with a chance of winning anything from £25 to £1m.

Be aware that not everyone can win the million, but the more you invest, the greater the chance you’ll see some winnings.

3) Use your joint allowances

Let’s take the example of you and your spouse (or civil partner), who have a joint account and you have earned £1000 interest.

If one of you is a basic rate taxpayer and the other a higher rate taxpayer, the interest earned would normally be split down the middle.

As the basic rate taxpayer gets a PSA of £1,000, they will still have £500 of their tax-free interest allowance remaining, while the higher rate taxpayer’s PSA of £500 would be used up. They would need to pay tax on any further interest if they have other savings.

As a sole account holder, any interest earned on savings in your own accounts will count towards your individual PSA.

However, if one of you has maxed out your PSA and the other person hasn’t, you could maximise your combined PSAs by moving some of your savings to the other person’s account.

However, you should only do this with someone you trust. Once the money is in the other person’s account, you won’t be able to access it.

4) Split your savings

You can also split your savings across various fixed-rate accounts with different terms. This could allow you to spread out the interest payments across separate tax years and potentially reduce your tax bill.

For example, if you don’t need immediate access to your money, you could distribute a large lump sum across one, two, three, four and five-year fixed-term savings accounts.

If you choose to have the interest paid upon maturity, then the income earned on your nest egg will also be spread across several different tax years and won’t take such a large chunk out of your PSA.

With most savings accounts, the interest is paid monthly or yearly, but with a fixed-rate savings account longer than a year, you can opt for the interest to be paid at maturity.

This has the advantage of interest compounding so that you will earn more overall. But you need to be careful that the amount doesn’t exceed your PSA in the year you have to take it, as you may end up paying tax.

If you’d like further recommendations on how to maximise your Personal Savings Allowance and reduce your tax liability, do get in touch.

The value of investments can fall as well as rise and is not guaranteed.