Tax On Interest Generated By Savings

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Welcome to our quick guide to the tax that you may have to pay on any interest that comes from your savings.

This guide is meant as an overview. Full information can be found on the government website.

The two initiatives which affect the tax on your savings interest

Personal Savings Allowance

The term ‘personal savings allowance’ refers to the amount of interest that you can earn on your savings, without paying tax on it.

Bank or building society accounts that accrue interest such as savings accounts and applicable current accounts count toward this allowance. Savings in trusts or bonds may also count, further information can be found on the government website.

(Note that interest from ISA accounts does not count toward your personal saving allowance as it is tax free.)

The amount of personal savings allowance that you’re entitled to depends on your tax bracket:

  • Basic rate (20%) tax payers can earn £1,000 of interest on savings without paying tax. This band includes people with a taxable income between £12,571 and £50,270*
  • Higher rate (40%) tax payers can earn £500 of interest on savings without paying tax. This band includes people with a taxable income between £50,271 and £125,140*
  • Additional rate (45%) tax payers have to pay tax on all interest earnt on savings. This band includes people with a taxable income of over £125,140*

*Income tax bands are different if you live in Scotland but for the purpose of your personal savings allowance, English tax bands are used. Figures taken from www.gov.uk/income-tax-rates as of 8th November 2023 but may be subject to change.

If you have a joint account then the interest earned is split equally between the account holders when it is taken from the allowance. For example:

£1,000 of interest is earned in an account which is serviced by two tax payers, one on basic rate and the other on higher rate.

The basic rate taxpayer has an allowance of £1,000 and the higher rate taxpayer has an allowance of £500.

As the interest is split equally, the basic rate tax payer uses up £500 of their allowance and has £500 remaining. The higher rate tax payer uses up all of their £500 allowance.

Starting Rate For Savings

In addition to the personal savings allowance, if your income is below £17,570 then you may be entitled to up to an additional £5,000 in savings interest, tax free. This is worked out as follows:

You begin with £5,000 of tax free savings interest.
For every £1 you earn above £12,570, your personal savings allowance (£5,000) decreases by £1.
As an example, if you earn £16,000 your allowance decreases by £3,430.

In the above case you would be entitled to £1,570 under the ‘starting rate for savings’ initiative so your total tax free savings allowance would be £2,570 (when you also include your £1,000 personal savings allowance).

Summary

The tax that you may have to pay is dictated by your total annual income.

If you earn up to £17,570 it’s a little more complicated:

  1. Take your personal tax allowance which is £12,570 for 2023/24 (but this may differ if you claim marriage or blind person’s allowance)
  2. Add £6,000 in combined savings allowances
  3. Deduct any non savings income (eg wages or pension)

Taking the example above, if you earn £16,000 in wages: £12,570 + £6000 - £16,000 = £2,570, which is the amount of interest that you can accrue from savings without paying tax.

If you earn between £17,571 and £50,270:
You are entitled to £1,000 of savings interest free

If you earn between £50,271 and £125,140:
You are entitled to £500 of savings interest free

If you earn over £125,140 then you must pay tax on all interest accrued from savings.

How do I pay the tax?

If you are employed or receive a pension then any tax payable is automatically deducted from your income by HMRC via a change to your tax code. Please see the government website for full details.

If you complete a Self-Assessment tax return, you are required to report any interest earned on savings as part of your return.

If you’re not employed, do not get a pension or do not complete Self-Assessment, your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will let you know if you need to pay tax and how to pay it.

What if I’m a non tax payer?

If your income is less than £12,570 per year, you can earn up to £18,570 in interest from your savings before paying tax.

We are aware that instructions around tax can be confusing and hope that you’ve found the guide useful. More detailed information on savings allowances can be found on the government website.

If you have a question about saving with The Cumberland, feel free to visit your local branch, give us a call on 01228 403141 or book an appointment with a member of our team. Please note however that we are unable to provide advice on tax related matters.