Do I need to pay tax on my savings?

No matter what you’re saving for, it’s important to understand how tax on savings works so you can make an informed decision about what to do with your money.

How much can you have in a savings account before you get taxed?

In the UK, you aren’t taxed on how much you have in savings but on how much money you earn in interest. Most people can earn some interest on their savings without needing to pay tax. The total amount of interest you can earn tax free will depend on your income from other sources, such as your salary or pension. 

There are two key things that will influence how much you can have in a savings account before you get taxed: (1) your interest rate (2) your total income. This means some people could pay tax on a very small amount of savings, whilst others won’t pay even on a much larger amount. 

When don’t I need to pay tax on the interest I’ve earned?

You may be eligible for allowances, that means you don’t have to pay tax on all (or any!) of the interest you earn from your savings. 

1) Personal allowance

In the UK, the amount of tax you pay depends on your income, but most people will have a ‘standard’ personal allowance. This is the amount of income you can earn without having to pay taxes. The standard personal allowance for the tax year 6th April 2023 - 5th April 2024 is £12,570. 

This means that you only need to pay tax on earnings over £12,570. If you earn below this amount, you don’t need to pay tax. 

Things get a little more complicated if you make over £100,000 a year because you lose £1 of your personal allowance for every £2 over £100,000 you earn. You can find out more about this on the government website.

Your personal allowance includes all of your income, so if it isn’t used up by your other income, such as your wages or pension, you can use it to earn tax-free interest on your savings. 

2) Savings Starter Rate

The starting rate for savings or savings starter rate is designed to help those on lower incomes pay lower or no tax on their savings. The maximum savings starter rate is £5,000. To qualify for the starter rate for savings, your other income should not exceed £17,570 annually.

Your starter rate amount will depend on how much you earn from your other income, such as your wages or pension. For every £1 above your personal allowance (£12,570) you make in additional income, your starter rate will decrease by £1.

For example, if you earn £15,000, you’ll earn £2,430 (£15,000-£12,570) above your personal allowance.  This means your starter rate for savings would be £2,570 (£5,000-£2,430). You could earn up to £2,570 in tax-free interest through the savings starter rate. 

3) Personal savings allowance 

Many UK savers will have a personal savings allowance - this is the interest you can earn through savings without paying tax. Your personal savings allowance depends on your income tax band. 

• If you’re a basic rate taxpayer, you can earn up to £1,000 in tax-free interest

• If you’re a higher-rate taxpayer, you can make up to £500 in tax-free interest

• If you’re an additional rate taxpayer, you’re not eligible for the personal savings allowance

If you’re unsure what income tax band you’re in, you can find out on the government website. 

So how does all this work in practice?

It can be tricky to understand how these different allowances work together, so here are a few examples:

Example 1: You’re a part-time worker who earns £13,000 per year. You earn £430 over your income tax personal allowance, but you’re under the £17,570 threshold for the starting rate for savings. 

This means you can earn £4,570 in tax-free interest through the savings starter rate, plus an extra £1,000 through your personal savings allowance. In this case, unless you earn more than £5,570 in interest, you won’t need to pay any tax on your savings. 

Example 2: You’re retired and have a total annual income of £18,000 from your state and workplace pension. Because you earn more than the £17,570 threshold for the starting rate for savings but are within the basic rate tax band, you have a personal savings allowance of £1,000. This means you can earn £1,000 in tax-free interest. 

Example 3: You’re in full-time employment and earn £55,000 annually. As a higher-rate taxpayer, you can earn £500 in interest from savings before paying tax. 

What happens if the interest I earn on my savings is more than my allowances?

If your interest earnings exceed your allowances, you'll need to pay your regular income tax rate on the extra amount. If your interest earnings push your total income over the threshold for the next tax band, you will need to pay the higher tax rate on all of the income that falls in that band.

Here are the income tax bands:

Remember, if you’re an additional rate taxpayer, you don’t have a personal savings allowance and will have to pay tax on any interest you earn from savings. 

Here’s an example of how much tax you’ll pay on your savings interest if you exceed your personal savings allowance:

If you earn £22,000 per year from your job and receive £1,200 in savings interest, as a basic rate taxpayer with a £1,000 personal savings allowance, you will be taxed at 20% on the excess £200. This means you will owe £40 in tax on your savings interest.

Does HMRC know about my savings?

HMRC (Her Majesty's Revenue and Customs) is informed about your savings by the bank, building society, or credit union where you have an account. However, they do not take the tax you owe on savings from your account directly.

If you’re employed or receiving a pension and exceed your personal savings allowance, any tax you owe is automatically collected from your income through your tax code. 

If you’re not receiving income from anywhere else, your savings account provider will inform HMRC how much interest you’ve earned each year. If it means you need to pay tax, HMRC will get in touch with you to tell you how much you owe and how you can pay it. 

Do you have to tell HMRC about savings?

If you are self-employed or pay tax through self-assessments, you must inform HMRC about any interest earned from your savings. Whatever your income from other sources, you must register for Self Assessment if you earn more than £10,000 from savings and investments. To confirm if you need to register for Self-Assessment, you can check the GOV.UK website.

Tax-free savings accounts

In recent years, it was a lot less likely that you would exceed your tax-free savings allowances because interest rates on savings accounts were low. Now they are higher, you may want to consider tax-free accounts like ISAs. 

Each tax year, you can deposit up to £20,000 into an ISA (Individual Savings Account) without paying tax on any money you earn. There are two different types of ISAs: (1) Cash ISAs, which are just like a savings account where you earn interest on the balance you hold in the account and (2) Stocks and shares or investment ISAs, where you can invest in the stock market and other types of assets. You can only open one of each type of account each year. 

While investing in stocks and shares or investments ISAs gives your money the potential to grow, it's important to understand that investing comes with risk. The value of your initial investment can go up as well as done and any income from it isn’t guaranteed.