what exactly is a personal savings allowance?

Ahh, Personal Savings Allowance (PSA): the magic that lets you earn interest on your savings without any pesky taxes putting their nose in it.

Personal Savings Allowances are like your trusty wingman in the savings game. If you're a basic-rate taxpayer, you get a sweet £1,000 tax-free allowance for interest. And don't worry, higher-rate taxpayers, you still get a nifty £500 allowance. Not too shabby.

the pros and cons

pros:

• Easy-peasy: they're super simple to use. Just let your money do its thing, and you're good to go.
• Tax-free allowance: you get to keep all that interest you earn – no taxes lurking around!

cons:

• Tax bracket matters: your allowance depends on whether you're a basic-rate (£12,571-£50,270 income) or higher-rate taxpayer (£50,271-£125,140 income).
• Not all gains are covered: keep in mind, Personal Savings Allowances only apply to interest. Other investment gains aren't included.

so what does this mean for me?

You can totally make Personal Savings Allowances work for you. If you're a savvy saver with interest below the allowance, it's a no-brainer. Keep your money flexible and watch it grow without any tax trouble. 

The difference between a PSA and an ISA can be blurry, but the main takeaways are that ISA’s are always out of the tax-man’s reach, and so can be more secure in the long-term (good if you're a higher tax-rate taxpayer). Personal savings accounts can oftentimes have higher interest rates, though, and could be more beneficial for shorter-term savings (especially for basic-rate taxpayers). It's always worth getting the scoop on both options and seeing which pros and cons apply to you.

Our money dictionary deciphers big terms into smaller chunks, so you can focus on just the important bits.