How can you keep the most of your hard-earned savings interest? The Personal Savings Allowance (PSA) is a powerful tool for tax-efficient saving in 2024-25. Yet, how can you maximise your allowance and integrate it with your wider financial plan?
Below, our financial planners in Stockton-on-Tees offer a short guide to the Personal Savings Allowance for 2024-25. We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser:
t: 01228 210 137
e: [email protected]
What is the Personal Savings Allowance?
The Personal Savings Allowance refers to the maximum amount of tax-free interest a UK taxpayer can earn each year (outside of other tax-efficient “vehicles”, such as pensions or ISAs) without the need to pay income tax on that interest.
In 2024-25, the Personal Savings Allowance stands at £1,000 for a Basic Rate taxpayer. For someone on the Higher Rate, it is £500. For an Additional Rate taxpayer, their PSA is £0. The allowance extends to all investment platforms, banks, and building societies where individuals hold accounts that provide savings income (interest).
For example, let’s assume a basic rate taxpayer (with a PSA of £1,000) has £10,000 in a savings account paying 5.00% interest. Over the course of a year, this earns them £500 which is within their PSA and so there is no tax to pay. However, let’s assume the same taxpayer now has £30,000 saved in the same bank account and this now earns them £1,500 per year. This would be above their PSA and the excess would be taxed at their marginal rate of income tax.
Please note that the Personal Savings Allowance is different from the Personal Allowance. The latter refers to the tax-free threshold for your annual earnings (e.g. wages) and stands at £12,570 in 2024-25.
The “Starting Rate” for savings
For low earners, it is possible to earn even more interest tax-free. Suppose someone does not earn an income right now (e.g., taking a career break to raise children). Or, maybe you earn under the £12,570 Personal Allowance or slightly above it. Here, a “starting rate” for savings typically applies.
In 2024-25, an individual who earns £12,570, or below, can earn up to £5,000 in tax-free interest. This is in addition to their Personal Savings Allowance.
Every £1 earned above £12,570 (the Personal Allowance) reduces this £5,000 starting rate by £1. Once your “non-interest” income reaches £17,570, your starting rate effectively disappears and you are again limited by the PSA.
What about my investment income?
There can sometimes be confusion about which types of income fall under your Personal Savings Allowance. Interest from cash interest can use up your allowance, but what about other assets like shares?
Dividend income is subject to a separate tax system (dividend tax). In 2024-25, an individual can earn up to £500 from dividends outside ISAs without tax.
The rate of tax depends on your highest income tax bracket and remaining allowance, ranging from 0% up to 39.35%.
Premium Bond Prizes do not use up any Personal Savings Allowance. This is because they offer the chance of a monthly prize draw, not a guaranteed rate of interest (like a regular cash account).
Payments to investors from bonds (e.g. coupons from government bonds, or “gilts”) are classed as savings income. Therefore, bonds can use up your Personal Savings Allowance if they are owned outside an ISA, such as in a general investment account.
2024 and the “Savings Tax Trap”
As the UK has battled higher inflation over the past two and a half years, the Bank of England (BoE) has repeatedly raised interest rates to try and control the price level.
One byproduct of this has been rising interest rates offered by savings accounts. Naturally, savers have welcomed this, yet some people have been caught off-guard. In previous years, when interest rates were low, only people with very large cash savings would have earned interest over the PSA. However now, people with more modest savings are being caught out. Rising interest rates have increased the likelihood that individuals will breach their Personal Savings Allowance (maybe inadvertently).
Maximising the PSA in 2024-25
Financial planning can help avoid needless taxes on savings and other investment income. Below, our Stockton-on-Tees financial advisers offer a few ideas. However, please discuss your options with an adviser for specific recommendations in your own unique case.
Firstly, take stock of your savings and consider your Personal Savings Allowance for 2024-25. Are you likely to go over your PSA based on your current interest rates? What if they rise?
For some, this process may highlight certain weaknesses in their savings plan. Perhaps their “emergency fund” is running a bit low. In which case, how might you rebuild it in the most tax-efficient manner?
For many clients, it is helpful to coordinate their PSA with their ISA allowance. In 2024-25, the latter allows an individual to contribute up to £20,000 per year to their ISAs, generating dividends, capital gains and interest without tax.
If you are likely to breach your PSA in 2024-25, then committing certain interest-generating assets to your ISA(s) could help to optimise your tax plan. However, you need to consider the “opportunity cost” this might pose.
For instance, every £1 committed to cash savings in an ISA is £1 less than could have been invested in other assets, such as equities or bonds. The latter might offer a higher rate of potential returns compared to the interest from cash.
Working with a financial adviser can help you to work through these complex considerations, arriving at decisions which best reflect your financial goals and circumstances.
Invitation
If you would like to discuss your financial plan and savings strategy, we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside, and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.