We all know we need to pay tax when we earn a certain amount each year. But what if you’re getting interest from your savings? Well, even though you don’t always pay tax on savings accounts, it does depend on just how much interest you’re pocketing — and whether you’re eligible for certain tax free allowances.
Because it hasn’t been earned from your job or a side hustle, you may not realise that any interest you gain from having savings is technically classed as ‘income’ (and subject to the same tax rules as a result). Thanks to certain tax free allowances, however, you don’t always have to pay tax on savings accounts.
Let’s face it: no one wants to be hit with a bill that they haven’t prepared for.
And, when it comes to tax on saving account interest, there are a range of factors that impact whether you’ll have to pay this or not, including your salary and how much interest your cash is actually earning. So, if you’re looking for the best savings account rates, this is something you’ll probably want to consider.
Which leads us nicely onto our first question…
Do I have to pay tax on savings?
Technically, no, you don’t pay tax on the actual money you have tucked away for a rainy day. However, if it’s gaining interest, you may be taxed on that.
By ‘interest’, we’re referring to any money you make from having cash savings. This is a percentage of how much you have tucked away in your savings account, and is paid out by the bank, building society, or provider it’s with.
And we say ‘may’, because most people in the UK are allowed to earn a certain amount of tax free interest each tax year (which always starts on the 6th of April). We’ll go into this in more detail later.
How does tax on saving account interest work?
When you get paid a salary from employment, the tax you owe is taken before the money even reaches your bank account. This means you don’t need to do anything.
It’s a similar story with tax on saving account interest. If you go over your allowance, HMRC will usually change your tax code for you. This means you pay it automatically and won’t have to do the hard work of calculating it yourself.
Any tax you owe will be charged at the same rate as Income Tax: so, 0%, 20%, 40%, or 45 %. However, the percentage you pay will depend on the individual and which Income Tax band they’re in.
It doesn’t matter whether your savings are with a traditional bank, building society, or in a digital savings account (which can be opened and managed online). The exact same rules apply.
Another thing worth knowing is that when it comes to what interest you could be taxed on each year, the interest is taken into consideration during the year you can access it – and not necessarily the year you earned it.
What are the tax free allowances for savings?
Essentially, there isn’t a tax free allowance for savings. There are, however, a couple of others that do have an impact on how much you can earn in interest without paying tax.
Your Personal Tax Allowance
Also called a ‘Personal Allowance’, this is the maximum amount of money you can earn tax free each year. This income may come from things like your day job (including any businesses you own), dividends from investments, rent you get as a landlord and, of course, interest you generate from your cash savings.
For the 2023/24 tax year, this stands at £12,570, but there are a couple of things that can impact yours:
If your income is over £100,000 per year, your Personal Tax Allowance will be smaller (although if you earn more than £125,140, you won’t have one at all).
If you claim Marriage Allowance or Blind Person’s Allowance, your allowance could be higher.
This means that if you have a lot of money tucked away in a high yield savings account that pays you a higher interest rate, you could pay more tax if the amount you earn pushes you over your Personal Tax Allowance amount each year.
However, that interest may fall within your Personal Savings Allowance (we’ll go into that next).
It’s also worth noting that your Personal Tax Allowance will reset when the next tax year begins on the 6th of April. This means it could be subject to change in the future.
Your Personal Savings Allowance:
Thanks to this allowance, you could earn up to £1,000 of interest tax free each tax year — although this depends on what Income Tax bracket (or ‘band’) you’re in.
This means it ties back to your Personal Tax Allowance, as this is also impacted by how much you earn. As we already mentioned, during the current tax year, you can earn up to £12,570 without paying tax.
To figure out what Income Tax bracket you fall into, add up all your income for the tax year, not forgetting about savings account interest when doing so.
You can then work out your Personal Savings Allowance using the below:
|Income Tax bracket
|Personal Savings Allowance
|£12,571 to £50,270
|£50,271 to £125,140
If you’re still not 100% sure what counts towards ‘income’ or you live in Scotland (where Income Tax is different), why not check out our guide to Income Tax brackets?
The ‘starting rate’ for savings:
Finally, there’s also something called a ‘starting rate for savings’, which means you could be entitled to earn up to £5,000 interest each year without paying tax. But this allowance doesn’t apply to everyone.
Here’s a breakdown of how this works:
- If your other income is £17,570 or more: you won’t get a starting rate for savings.
- If your other income is less than £17,570: your starting rate will be a maximum of £5,000, and every £1 of other income you earn above your Personal Allowance (which is currently £12,570 per year) will reduce your starting rate by £1.
Have a joint savings account or unsure about other ‘interest’ you can earn within these allowances? Visit the HMRC website for more information on tax on savings.
If you’re looking to begin your saving journey, knowing how much tax you could pay is a good place to start. But just remember that tax on saving account interest isn’t one-size-fits-all: it depends on much income you bring in from your job and any other sources, too.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.