What you need to know about the personal savings allowance
What is the Personal Savings Allowance?
The profit earned on a savings account is classed as income. However, basic rate taxpayers (20%) are able to earn £1,000 in savings income tax free, whilst higher rate tax payers (40%) receive a £500 allowance. Additional rate (45%) taxpayers do not receive any allowance.
Note that if you live in Scotland and pay different rates of income tax, for the purposes of the personal savings allowance the English tax bands are used - so for 2020/21 most will have the full £1,000 PSA if you earn up to £50,000.
Does this mean profits from my Sharia-compliant accounts will be tax-free?
Yes, within your Personal Savings Allowance limits. Sharia compliant savings accounts benefit from the Personal Savings Allowance.
Does the profit I earn from my Al Rayan Bank ISA count towards my Personal Savings Allowance?
No. Profit from your ISA is already tax free and won’t count towards your Personal Savings Allowance limit. It will still be paid tax free. So, if you earn £100 in ISA profit, and you're a basic-rate taxpayer, you'll still have the £1,000 Personal Savings Allowance to cover other savings income.
Will I be taxed on the profit from my Al Rayan Bank savings account?
You won’t pay tax on the profit as long as you remain within your Personal Savings Allowance.
What happens when I exceed my personal tax allowance?
A: Any profit that exceeds your Personal Savings Allowance will be taxed by HM Revenue & Customs (HMRC) through either Pay As You Earn (PAYE) or self-assessment.
How much tax will I need to pay?
This will depend on the amount of tax you pay, and also your ‘adjusted net income’. Your adjusted net income is total taxable income less certain tax relief and can be calculated following the straightforward steps on the HMRC website.
Do I have to register with anybody for the Personal Savings Allowance?
No. All profit will automatically be paid without being taxed. If you fill in a Self-Assessment tax return you should carry on doing this as normal.
You can find out more information about the Personal Savings Allowance on Gov.UK.