Confusion regarding PSA and Personal Tax free allowance reduction

wisdenfan

Hi All,

I have some confusion regarding the Personal Savings Allowance (PSA), total taxable income and personal tax free allowance. Is the PSA taken into account to calculate the total taxable income? Also, does the PSA reduce the personal tax free allowance? I’ll use an example here to illustrate my questions.

Let’s say for tax year 2023/2024, my total income from my work was £1,00,000 (after all the pension contribution), and I also received £500 interest from my non-ISA savings accounts (so within my PSA limit). Does it mean – i) that my total taxable income for the tax year is £1,00,500 and ii) does it reduce my personal tax free allowance to £12,320 (i.e. £500 over 100K reduces allowance by £250, thus £12570-£250 = £12320)?

Any insight on this is highly appreciated.

TheSpectator

wisdenfan said:

Hi All,

I have some confusion regarding the Personal Savings Allowance (PSA), total taxable income and personal tax free allowance. Is the PSA taken into account to calculate the total taxable income? Also, does the PSA reduce the personal tax free allowance? I’ll use an example here to illustrate my questions.

Let’s say for tax year 2023/2024, my total income from my work was £1,00,000 (after all the pension contribution), and I also received £500 interest from my non-ISA savings accounts (so within my PSA limit). Does it mean – i) that my total taxable income for the tax year is £1,00,500 and ii) does it reduce my personal tax free allowance to £12,320 (i.e. £500 over 100K reduces allowance by £250, thus £12570-£250 = £12320)?

Any insight on this is highly appreciated.

Your misplacing of commas is cinfusing matters - is '£1,00,000 supposed to be £100,000?

If so, yes you add £500 savings income to your £100,,000 income for the purposes of calculating any reduction in your personal allowance.

Dazed_and_C0nfused

wisdenfan said:

Hi All,

I have some confusion regarding the Personal Savings Allowance (PSA), total taxable income and personal tax free allowance. Is the PSA taken into account to calculate the total taxable income? Also, does the PSA reduce the personal tax free allowance? I’ll use an example here to illustrate my questions.

Let’s say for tax year 2023/2024, my total income from my work was £1,00,000 (after all the pension contribution), and I also received £500 interest from my non-ISA savings accounts (so within my PSA limit). Does it mean – i) that my total taxable income for the tax year is £1,00,500 and ii) does it reduce my personal tax free allowance to £12,320 (i.e. £500 over 100K reduces allowance by £250, thus £12570-£250 = £12320)?

Any insight on this is highly appreciated.

Yes, taxable interest is still taxable income even if it is taxed at 0% (PSA is a 0% tax band, not an allowance in the normal sense).

So it quite possible for interest of £500 to reduce your Personal Allowance by £250.

It is your adjusted net income which determines your Personal Allowance and that £500 forms part of your adjusted net income.  In the same way £500 of dividends (also taxed at 0%) would.