UK households are being hit with a £203 lower tax allowance from HMRC than many expected. Many taxpayers earning over £50,270 believe they can earn £703 a year in savings interest before paying tax, but the real allowance is only £500, according to the Yorkshire Building Society.
Understanding the Personal Savings Allowance
The amount of Personal Savings Allowance (PSA) available depends on the Income Tax band that applies to you. To determine your band, you should add together the taxable interest you have received with your other taxable income.
Many individuals have only recently crossed the £50,271 income threshold because tax bands have been frozen, rather than as a result of significant pay rises or lifestyle changes. Yet the moment someone enters the higher-rate band, their PSA is instantly halved, from £1,000 to £500 - a shift that many fail to notice or understand.
Expert Insights
Tina Hughes, director of savings at Yorkshire Building Society, says: "Many higher-rate taxpayers don't recognise themselves as such. They haven't had a sudden lifestyle change or big pay rise - they've simply been nudged over a frozen threshold. Overnight, their savings allowance is halved, yet our research shows most people don't fully understand what that means."
If you are a basic rate taxpayer, you would not pay tax if you were to earn the following in one tax year: £1,000 interest in an ISA or £500 interest in a different savings account. This is because the interest earned in an ISA does not count towards your PSA.
She adds: "Alongside this, the reduction in the Cash ISA allowance for under-65s limits how much people can shield from tax in the first place. This isn't a failure of individuals - it's the result of a system that hasn't kept pace with economic reality and leaves too many people in the dark. If we want people to build financial confidence, we need modernised savings tax rules and much clearer guidance, so people understand their position before they're caught out."
