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Ella Mower

Senior Content Writer
Published: 20/02/2024
Piggybank Savings

With over 1.4 million people predicted to become higher-rate taxpayers by the end of the financial year, it’s crucial to understand your Personal Savings Allowance.

Last year saw savings rates skyrocket, as the market responded to 14 consecutive hikes to the Bank of England base rate. As a result, many savers may have been faced with a tax bill from HMRC as they earned enough in interest to breach their Personal Savings Allowance (PSA) – some for perhaps the first time.

While average savings rates seem to have cooled off from their recent peaks, they continue to sit higher now than a year ago.

This, alongside frozen income tax brackets, could see many more stung by a new or increased tax bill in the new fiscal year, beginning on 6 April. It therefore remains crucial to factor in the PSA when reviewing your finances in 2024.

What is the Personal Savings Allowance?

The PSA is the maximum amount of interest you can earn from savings, investments and life insurances before having to pay tax. This threshold stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers (with additional rate taxpayers not qualifying for an allowance).

When it was first introduced in 2016, lower interest rates were the norm and the PSA typically only affected more affluent savers. Now the UK operates in a higher-interest rate environment, more will likely be taxed on their savings.

Interest rates remain high

Back in February 2023, the average easy access account paid 1.76%. At this rate, a basic-rate taxpayer could deposit almost £57,000 before breaching their PSA. In contrast, with the average easy access account now offering 3.17% on a first-of-month basis, at this rate it would take a much smaller deposit of £32,000 to exceed the allowance.

However, top easy access accounts continue to offer attractive rates in excess of 5.00% AER. The Loyalty Saver from Ulster Bank, for instance, pays 5.20% AER at the time of writing. This means, if you were to open this account as a basic-rate taxpayer, you’d only be able to deposit £21,000 before being taxed. Meanwhile, higher-rate taxpayers would only be able to deposit approximately £9,500 before breaching their allowance.

It’s a similar picture when it comes to fixed rate bonds. While average rates in this market have experienced a downward trajectory lately, they remain higher than a year ago. At 4.62%, the rate paid by the average one-year bond currently sits over one percentage point higher than at the start of February 2023. Meanwhile, the market-leading fixed rate stands at 5.21% AER at time of writing.

How do you pay tax on your savings?

Any interest earned above your PSA will be taxed at your usual rate of Income Tax. This happens automatically if you’re employed or if you receive a pension. HMRC will review your tax code, using the amount of interest you accumulated the previous year to estimate how much you could earn in the current tax year.

However, if your income from savings and investments is over £10,000, you’ll need to complete a Self-Assessment tax return and report. If you’re not sure whether this applies to you, you can find out whether you need to send a tax return via the Government website.

Otherwise, if you’re not employed, don’t receive a pension, and don’t complete a tax return, your savings provider will tell HMRC how much interest you gained at the end of the year. HMRC will then inform you if you’ll be taxed and how to go about paying it.

1.4 million more higher-rate taxpayers

Aside from higher interest rates, fiscal drag could also see you having to pay a new or increased tax bill. This occurs when wages increase but Income Tax thresholds remain frozen.

In its analysis of official figures released alongside the Autumn Statement 2023, Coventry Building Society estimates 1.4 million more people will become higher-rate taxpayers by the end of the current financial year, and as a result will see their PSA halved.

This forms part of a wider 3.8 million people being dragged into a higher bracket by the end of the 2023/24 tax-year, according to figures from the Office for Budget Responsibility’s Economic and Fiscal Outlook.

“The OBR’s estimates are a clear sign that people should take urgent action to review their finances and start actively managing their tax-free savings,” commented Jeremy Cox, Head of Strategy at Coventry Building Society.

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Tax-free alternatives

If you’re looking for a tax-free wrapper for your savings, there are other options available.

Cash ISAs

“Over the years, Cash ISAs have been an essential way for consumers to protect their savings returns from tax, and they are still worth taking advantage of today,” explained Rachel Springall, Finance Expert at

While Cash ISAs typically offer slightly lower returns than traditional savings accounts, some of the top variable and fixed rates in this market still stand above 5.00% AER. The main benefit, though, is any interest earned using an ISA is automatically tax-exempt and won’t count towards your PSA.

However, keep in mind the annual ISA allowance, which dictates you can only put away up to £20,000 in ISAs within a tax year. Those with a larger deposit may need to consider splitting their balance across a combination of both savings accounts and ISAs or making smaller deposits over multiple tax years.

Compare the best Cash ISA rates

Our dedicated charts are updated regularly throughout the day to show you the best easy access, fixed rate and notice Cash ISA rates on the market.

Premium Bonds

Alternatively, if you’ve used up your ISA allowance for the year, you could consider buying Premium Bonds from the Government-backed brand, National Savings and Investments (NS&I).

Unlike traditional savings accounts which pay interest, Premium Bonds offer monthly tax-free prizes ranging from £25 to £1 million.

Despite a recent reduction to its prize fund rate, the odds of winning with Premium Bonds remain at 21,000 to one. Bear in mind, though, a win is not guaranteed. Find out more about Premium Bonds with our guide.


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