The change does not only affect wealthy individuals. Ordinary savers with emergency funds or money set aside for a house purchase may now exceed the Personal Savings Allowance (PSA) without realising it, as interest earned across multiple taxable accounts is combined by HM Revenue & Customs (HMRC).
The increase in savings interest over recent years has made the fixed PSA more significant for many households. At the same time, frozen income tax thresholds mean that more people are being drawn into paying tax on interest that would previously have fallen within their allowance.
How the Personal Savings Allowance Can Be Exceeded
According to The Express, basic-rate taxpayers can earn up to £1,000 in savings interest each tax year before paying tax, while higher-rate taxpayers have a reduced allowance of £500. Additional-rate taxpayers do not receive a Personal Savings Allowance.
The amount of savings needed to exceed these limits depends on the interest rate. A basic-rate taxpayer earning 4% interest would go beyond the £1,000 allowance with £25,000 held in taxable non-ISA savings accounts. For a higher-rate taxpayer, the £500 allowance would be exceeded with £12,500. At an interest rate of 5%, those balances fall to £20,000 and £10,000 respectively.
Thomas Drury, a money-saving expert at The Investors Centre, said many people mistakenly believe the allowance applies separately to each savings account. According to The Express, the allowance instead applies to the total interest earned across all eligible accounts. Interest from bank and building society accounts, credit unions, certain bonds and peer-to-peer lending may all count towards the total, while interest earned within an ISA remains free from tax.
Drury illustrated the point by explaining that earning £300 from one bank, £250 from another and £200 from a fixed account may appear harmless when viewed individually, but together those payments amount to £750 in taxable interest.
HMRC Receives Savings Data Automatically
Banks and building societies report customers’ savings interest directly to HMRC, allowing the tax authority to calculate whether tax is due and, in some cases, adjust an individual’s tax code automatically.
According to The Express, moving savings between different providers does not prevent HMRC from seeing the total interest earned because the reported figures are combined. Drury also warned that HMRC may estimate future savings interest using previous years’ figures when calculating tax codes.
He noted that people whose fixed-rate accounts matured in the previous year could initially receive estimates that assume similar interest will be earned again, even if their circumstances have changed. Conversely, savers whose balances have increased may find that HMRC’s estimate is lower than the amount eventually earned.
The report also states that some individuals who complete a self-assessment tax return may need to declare their savings interest, depending on their circumstances and the amount of taxable interest received.
To reduce the risk of an unexpected bill, Drury advised savers to total the interest they expect to receive from every taxable account over the full tax year. He also suggested checking whether moving eligible savings into a Cash ISA could reduce future tax exposure, while stressing that access conditions, interest rates and product terms should always be considered before transferring money.
