Tax on savings accounts
Table of Contents
How much will I be taxed on my savings?
Low-income earners can benefit from the 0% tax ‘starting rate’ on savings of up to £5,000. This means you can earn up to £5,000 in interest before paying tax. This is reduced for every £1 you earn over your personal income tax allowance of £12,500 per year. For example, if you earn £13,500, then your 0% starting rate for savings would be £4,000.
Basic rate taxpayers can earn up to £1,000 per year tax-free. For higher rate (40%) taxpayers, it’s £500. In reality, less than 5% of UK savers will pay interest on the savings they earn.
What is the personal savings allowance?
The personal savings allowance was first introduced on 6th April, 2016. It allows savers to earn tax-free interest on their savings up to a certain limit. Every basic rate taxpayer in the UK has a personal savings allowance of £1,000. This means that the first £1,000 you earn from savings interest a year is tax-free. If you exceed your £1,000 allowance, then you will be taxed 20% on any interest you earn after that.
Higher-rate taxpayers can earn up to £500 tax-free, and anything you earn over that will be taxed at 40%. Additional-rate taxpayers have no savings allowance, which means you pay 45% tax on all your savings interest.
How much can I save before I go over my personal savings allowance?
This table shows how much you can earn tax-free on savings interest:
|Tax Rate||Annual personal income, not from savings||Tax-free interest on savings|
|No tax||£0 to £12,500||Earn a maximum of £5,000 tax-free with the 0% starting rate for savings|
|Basic rate taxpayer with a low income||£12,501 to £17,500||Earn up to £5,000 tax-free with the 0% starting rate of savings and up to a further £1,000 tax-free with your PSA|
|Basic rate taxpayer||£17,501 to £50,000||Earn up to £1,000 interest tax-free with your PSA|
|Higher rate taxpayer||£50,001 to £150,000||Earn up to £500 interest tax-free with your PSA|
|Additional rate taxpayer||Over £150,000||Not eligible for any savings interest allowance|
Are there any tax-free savings accounts?
Individual Savings Accounts (ISAs) are an option if you’re looking for tax-free savings and investments. The annual amount you can save in your ISAs is £20,000, and you won’t pay any tax. This is the total amount you can deposit in one year, regardless of how many ISAs you hold. There are several different types of ISA to consider, including:
- Cash ISAs – similar to a traditional savings account, there are three types of cash ISA: instant access cash ISA, regular savings cash ISA and fixed-rate cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
What if I earn interest other than from my savings accounts?
Your personal savings allowance is not only applicable to your savings accounts. If you own corporate bonds or other financial products that also pay interest, this interest will be included in your total annual PSA. The same applies if you invest in a trust or a similar fund that pays interest on dividends.
How do I pay tax on my savings?
Whether you are opening an ISA or another type of savings account, your tax should automatically be paid when you make a withdrawal. For example, fixed rate bonds typically pay interest when your term matures and the account is closed. If you’ve earned any interest over your PSA, the tax will be deducted automatically when your account is closed.
How can I apply for savings accounts online?
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