If you’ve been working hard to save for your future, you’ve probably looked around for the best interest rate you can get. But what you may not be aware of is how much interest you can earn on your savings before you have to pay tax. In this article we’ll explore the key issues in this area, so you’re fully informed about when and what you need to pay.
How much tax do you pay on savings?
Firstly, it’s useful to know that the amount of money you save isn’t important. What is important is the amount of interest you receive.
You’ll be pleased to hear that most people can earn some interest on their savings each tax year before they have to pay tax. For reference, the tax year runs from 6 April to 5 April the following year.
The total amount of interest you can earn before paying tax on your savings is based on your total income each tax year. This could be your salary but may include things like pensions and interest.
There are three factors to look at when you’re considering whether you need to pay tax –
- Your Personal Allowance can be used to earn interest tax-free if you haven’t used it up on your wages, pension or other income. For the 2024/25 tax year the standard Personal Allowance is £12,570. If your total income, including savings interest, is below this level you won’t have to pay any tax.
- The starting rate for savings is relevant if you earn less than £17,570 per year. Essentially, if you earn more than £12,570 but less than £17,570 a year, you can earn interest tax free on a sliding scale. At the start of the scale the maximum amount of interest you can earn tax free is £5,000. This decreases by £1 for each additional £1 you earn from other income, such as your wages or pension.
For example, if your wages are £15,000 and you receive £500 interest on your savings:
- The first £12,570 of your wages is covered by your Personal Allowance.
- This leaves £2,430 of wages, which means your starting rate for savings will be reduced by the same amount.
- Your remaining starting rate for savings will therefore be £2,570 (£5,000 minus £2,430). This means you wouldn’t have to pay any tax on your £500 interest, as it’s within your allowance.
Once your total other income reaches £17,570, you’re not eligible for the starting rate for savings.
- If your income is £17,570 or more, you’ll be allocated a Personal Savings Allowance. This is an amount of interest you can earn without paying tax and depends on which Income Tax band you’re in –
| Income Tax band | Personal Savings Allowance |
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
If you go over your Personal Savings Allowance, you’ll pay tax on any interest over your limit. This will be paid at your usual rate of Income Tax.
Do non taxpayers pay tax on savings interest?
If your total income is below your Personal Allowance, you won’t need to pay any tax on your savings interest. If your income and savings interest combined is more than your Personal Allowance, you’ll need to factor in the starting rate for savings and your Personal Savings Allowance. See the sections above for full details.
How much interest can a higher rate tax payer earn?
Higher rate tax payers can earn £500 interest each tax year before they have to pay any tax. If you’re an additional rate tax payer, this doesn’t apply though and you’ll have to pay tax on any interest you earn.
How does HMRC know my savings interest?
Whether your savings are held by a bank, building society, or another financial institution, they’ll let HMRC know how much interest you’ve earned each tax year. However, they won’t pay any tax you owe for you.
If you go over your Personal Savings Allowance and are paid a salary from your job, or receive income from a pension, HMRC will amend your tax code to collect any relevant tax.
If you’re self employed, you simply need to report any interest you earn as part of your Self Assessment tax return. It will then be factored into your overall calculations.
Are ISAs tax free?
There are several different types of Individual Savings Accounts (ISAs) on the market. These include cash ISAs, and stocks and shares ISAs. They all have one thing in common though. Any interest, dividends, or capital gains you earn within your ISA aren’t subject to tax.
As interest rates are currently higher than they have been for several years, investing in an ISA could be worth exploring. This is especially relevant if you think you’ll exceed the limits we’ve discussed above. For full details on the different types of ISA you could consider, along with how they work, take a look at our blog on ISAs.
