It’s important to know how your savings are taxed. Your personal savings allowance (PSA) depends on your tax band. This is the total amount of interest you can earn across your savings accounts without paying tax.
Currently, basic-rate taxpayers get their first £1,000 of savings interest tax-free. Higher-rate taxpayers have an allowance of £500 each year and additional-rate taxpayers will pay tax on all their interest.
Until recently only those with very high savings balances, or additional-rate taxpayers, would pay tax on their savings. But things are changing.
Personal Savings Allowance for the 2022/23 tax year:
| Tax band | Taxable income (excluding savings) | Personal savings allowance |
| Basic-rate taxpayer | £12,571 to £50,270 | £1,000 |
| Higher-rate taxpayer | £50,271 to £150,000 | £500 |
| Additional-rate taxpayer | Over £150,000 | No personal savings allowance |
This article isn’t personal advice. If you’re not sure if something is right for you, seek advice.
Please note, the PSA for Scottish taxpayers is based on the rest of the UK tax bands.
Interest rates have soared
Bank of England base rate hikes have caused a much-publicised spike in savings interest rates across the market.
In 2022, average one-year fixed term rates have shot from 0.31% to 3.54%, and even average instant access rates have seen a similarly striking rise from 0.11% to 1.51%.
The opportunity for better returns hasn’t gone unnoticed, as billions have been poured into fixed term products over the last year.
Savers who can get the best rates, could be earning over ten times more interest this year than in previous years – and are more likely to exceed their PSA.
But higher savings rates are just one side of the coin.
Millions could be pulled into higher income brackets
The pandemic recovery and sky-high inflation have also put enormous pressure on government finances.
In a bid to ease this pressure, the government announced in the 2022 autumn statement that the personal allowance and some income tax bands would be frozen until April 2028. The additional-rate tax band will also reduce from £150,000 to £125,140 from April 2023.
Inflation also means the wages of UK workers are likely to rise. Pairing frozen tax brackets with increasing pay creates a pinch effect – pushing many into higher brackets. In fact, just under four million people could be pulled into the higher-rate tax band over the years to 2028.
That would mean millions of new higher-rate taxpayers could see their PSA halved. Those pulled into the additional-rate tax band would see their PSA axed completely.
Can a Cash ISA help?
Unlike other savings accounts, all interest earned within a Cash ISA is free from UK income tax.
While they fell out of favour after years of low rates, by November 2022 the average variable rate Cash ISA was nearly nine times than it was a year earlier.
But before deciding whether to save in a Cash ISA, you should consider how long you’re saving for.
It’s important to make sure you have enough cash put aside for a rainy day in an easily accessible account. If you do, you might want to consider a Stocks and Shares ISA for money you’re not planning to spend in the next five years.
With a Stocks and Shares ISA, you invest your money. This gives it the potential to grow by more than sitting in cash over the long term. But there’s a trade-off. Unlike cash, the value of investments can rise and fall. This means you could get back less than you put in.
When it comes to an ISA, it doesn’t need to be an either/or situation. Think of it like a sound mixing board, you might put the bass up and bring the treble down, but they’re still working together, regardless of whether they’re equal.
You can put in up to £20,000 in the 2022/23 tax year across all ISAs, but remember you can only put money into one of each type of ISA per tax year. Tax rules can change, and the benefits depend on your personal circumstances.
Our Cash ISA offers a competitive variable rate from our banking partner. You can top up, earn tax-free interest, and withdraw, all in a few clicks in one online account.
You can’t currently access the HL Cash ISA through the HL App, or transfer other ISAs into the HL Cash ISA. Withdrawals usually take one working day.
An easier way to manage your savings tax
Active Savings gives you access to consistently competitive rates from our bank and building society partners, in one online account.
And you can download a single consolidated tax certificate for all your savings.
See your savings in one place, mix and match a huge variety of terms, and stay on top of your tax.
All without the hassle.
This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.
The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).