The Personal Savings Allowance (PSA) is £1,000 for basic rate taxpayers, or £500 for higher rate taxpayers, and allows for that amount of interest to be earned before any tax becomes payable. Additional rate taxpayers do not benefit from any PSA. 

The PSA was introduced from 6 April 2016, to coincide with basic rate tax no longer being deducted from interest paid by banks & building societies, in order to prevent savers having to pay tax on small amounts of interest received.

Adjusted for inflation since 2016, the PSA would now be worth more than £1,400 for basic rate taxpayers and £700 for higher rate taxpayers. 

Combined with recent higher interest rates, the PSA having remained unchanged for ten years means more taxpayers are likely to incur tax liabilities on their savings interest. 

The Bank of England’s Bank Rate (commonly referred to as the base rate) is the core interest rate in the UK and influences the rates available to consumers on savings accounts. In April 2016 the Bank Rate was 0.5%, but had climbed to 5.25% by April 2024  before falling to 3.75% recently. 

If a high street bank’s savings account paid interest annually and exactly matched the Bank Rate, a basic rate taxpayer in 2016 would have needed £200,000 of savings capital to generate sufficient interest to reach their Personal Savings Allowance. By contrast, the same taxpayer in 2024 would only have needed approximately £19,050 of savings capital to generate interest equal to their PSA. Any savings above that amount would create a tax liability. 

Tax on savings income can be collected in a number of ways, all of which impose an administrative burden on taxpayers either in reporting the income, or checking HMRC’s figures. If the PSA had been updated over the past decade, fewer taxpayers would have to deal with these complexities.