Do you pay tax on savings?

One benefit of putting your money into a savings account is the opportunity to earn interest on your savings.

Depending on what tax bracket you’re in, you might have a personal savings allowance (PSA). This is the amount of interest you can earn on your savings without paying tax.

If the interest you earn goes over your personal savings allowance, you might need to pay tax on it.

Something handy to know – if you keep your money in an individual savings account (ISA), you could save up to £20,000 tax free in the current tax year (known as the ISA allowance). This can be used in one ISA or split across multiple ISA types and accounts. 

Your personal savings allowance doesn’t apply in this case, as the interest earned through an ISA is already tax free. 

Your personal savings allowance is based on your tax bracket and income, so it’s not the same for everyone.

• 20% taxpayers (basic rate) – up to £1,000 of earned savings interest is tax free per tax year
• 40% taxpayers (higher rate) – up to £500 of earned savings interest is tax free per tax year
• 45%+ taxpayers (additional rate) – no tax free savings allowance per tax year.

You can find more information about income tax rates and personal allowances at gov.uk Opens an overlay [Will show a security message first]. 

The tax year runs from the 6 April to the 5 April the following year.

Savings income is the amount of money you earn from your savings. This could include:

• interest from non-ISA savings and current accounts for example fixed term savings
• income from corporate and government bonds
• interest earned on credit union accounts, trust funds, peer-to-peer lending, unit trusts, investment trusts and open-ended investment companies.

How you’ll be taxed on your savings depends on the way you normally pay tax.

HM Revenue & Customs (HMRC) collects the tax on savings interest in two ways:

1.  By changing your tax code. If you don’t complete a self-assessment tax return, HMRC will get the information from your bank and could change your tax code to reflect this.
2. Through your self-assessment tax return. If you usually complete a self-assessment tax return, you need to report all the types of income you have. HMRC then may change your tax code.

Sometimes, you might need to complete a self-assessment tax return – even if you don’t normally do one, e.g. if you find yourself earning more than £10,000 in savings interest.

Banks and building societies need to let HMRC know how much interest you earn at the end of the tax year.

Not always. If you’ve earned interest over your allowances, then yes. It’s your responsibility to pay tax on any interest earned that is above your allowances. But, if the interest earned is under your PSA, there’s no tax to pay. 

There are some tax efficient savings and investment accounts you might want to consider, especially if you’re looking to potentially grow your savings. These include:

• Cash ISAs*
• Stocks and shares ISAs for investment*
• Saving into a pension.

Any investment should be considered as a medium to long term investment, so should be held for at least five years. The value of investments can also fall as well as rise, and you may not get back what you invested.