Tax on savings: How much do you pay?
Interest earned on savings is taxable in the UK, but there are a number of tax-free allowances to take advantage of:
- Personal Allowance
- The starting rate for savers
- Personal Savings Allowance
- Individual Savings Accounts (ISA) allowance
- Tax relief on private pension contributions
Almost every person in the UK is entitled to a Personal Allowance, which is the set amount of income you can earn tax-free each financial year.
The Personal Allowance is set at £11,850 for 2018/19. For those earning over £100,000, this is reduced by £1 for every £2 you earn over £100,000. The maximum you can earn before your allowance is reduced to zero is £123,700.
For many, their Personal Allowance is taken up by their salary or income from self-employment. However, if your annual wage is less than £11,850, you can use your remaining allowance to shelter other forms of income from tax, including interest on savings.
If you earn less than £16,850 from other forms of income (such as wages or pensions), the starting rate for savings allows you to earn up to £5,000 of interest tax-free.
However, for every £1 you earn over your Personal Allowance, the starter rate is reduced by £1. If your income is £16,850 or above, you aren't eligible for the starting rate for savings.
Your salary is £15,000. Your Personal Allowance shelters £11,850 of your salary from tax, leaving you with £3,150 taxable. This reduces your starting rate for savings by £3,150, leaving you with £1,850 as your starting rate.
The Personal Savings Allowance is the amount of savings interest you can earn tax-free in the UK within each tax year. It's different from your Personal Allowance because it only applies to savings interest, rather than your net income. It's used in addition to your Personal Allowance when calculating how much tax you'll need to pay each year.
Your Personal Savings Allowance depends on the Income Tax band you fall into:
- Basic rate of Income Tax (20%): £1,000
- Higher rate of Income Tax (40%): £500
- Additional rate of Income Tax (45%): £0
Note: If you’re not sure which Income Tax rate you usually pay, see the Government’s guidance on Income Tax Rates.
Your Personal Savings Allowance covers interest from a few sources, including:
- Bank and building society accounts
- Savings and credit union accounts
- Peer-to-peer lending
- Unit and investment trusts
- Open-ended investment companies
- Trust funds
- Government and company bonds
- Life annuity payments
- Selected life insurance contracts
An Individual Savings Account (ISA) is a tax wrapper that shields interest on savings, or capital gains on investments, from tax. There is an annual cap on the amount you can contribute to ISAs each tax year, which is £20,000 for 2018/19, but the amount of interest or capital gains you can earn tax-free is theoretically limitless and depends on the performance of your product. Once you’re money is held within an ISA, you can also transfer money between ISAs with no annual limit (though any money contributed in the current tax year must be transferred in full, along with any interest earned on those funds).
Note: It’s your responsibility to make sure you don't exceed the annual ISA limit. If you do, you need to contact HMRC on their ISA helpline as soon as possible.
In the UK, you are able to make tax-free contributions to a private pension, including most workplace, personal, stakeholder and overseas pensions, up to a certain limit. This means that funds in your pension pot will grow without being taxed, just like an ISA.
You'll need to pay tax if your contributions are over:
- 100% of your annual earnings,
- an annual allowance of £40,000, or
- a lifetime allowance of £1.03 million
Note: You will also need to pay tax on contributions if your pension provider isn't registered for tax relief with HMRC or doesn't follow HMRC's rules and regulations.
How should I calculate tax on savings?
Your total tax-free savings allowance is any remainder from your Personal Allowance, plus your Personal Savings Allowanceand any starting rate you're due to receive. You also need to take into account the allowances for ISAs and pension contributions, as they provide another option for maximising your savings.
|Earnings||Personal Allowance||Personal Savings Allowance||Starting rate||ISA allowance||Tax relief on private pensions (annual contributions limit)|
|£11,850 or under||£11,850||£1,000||£5,000||£20,000||100% of your annual earnings|
|£11,851–£16,850||£11,850||£1,000||£5,000 minus £1 for every £1 you earn over £11,850||£20,000||100% of your annual earnings|
|£16,851–£39,999||£11,850||£1,000||£0||£20,000||100% of your annual earnings|
|£100,000–£123,700||£11,850 minus £1 for every £2 you earn over £100,000||£500||£0||£20,000||£40,000|
Your salary is £10,000, so in 2018/19 you qualify for:
- £11,850 Personal Allowance
- £1,000 Personal Savings Allowance
- £5,000 starting rate
Your Personal Allowance shelters your £10,000 salary from tax and leaves you with a £1,850 tax-free income allowance. This, combined with your other allowances, means that you can earn up to £7,850 interest on savings without paying tax.
You can also earn an unlimited amount of tax-free interest on ISAs and private pensions, though you cannot contribute more than £20,000 and 100% of your earnings respectively this year.
Your salary is £50,000, so in 2018/19 you qualify for:
- £11,850 Personal Allowance
- £500 Personal Savings Allowance
Your full Personal Allowance is used on your salary, so you do not have any remaining to shelter interest on savings. This means that you can earn up to £500 interest tax-free.
You can also earn an unlimited amount of tax-free interest on ISAs and private pensions, though you cannot contribute more than £20,000 and £40,000 respectively this year.
You earn £200,000. This means that, in 2018/19, you can only earn tax-free savings interest through ISAs and private pensions. You cannot contribute more than £20,000 and £40,000 respectively this year.
What happens if I go over my allowance?
If your interest on savings pushes you over your combined allowance, you will need to pay tax at your current Income Tax rate. Depending on your personal circumstances, any tax on savings will be paid a different way:
- If you’re employed or get a pension: Tax will usually be collected via the pay-as-you-earn (PAYE) system that’s normally used to collect Income Tax. HMRC will alter your tax code so that you pay tax on savings automatically. This is done by looking at what you earned in the previous year and then estimating your income in the current year.
- If you’re self-employed or file a Self-Assessment tax return: You will need to declare any interest earned on savings on your tax return.
- If neither of the above apply to you: Your bank or building society will inform HMRC of any interest you earned on savings in the year. HMRC will then contact you to tell you how to pay any tax due.
Note: Should your interest on savings be over £10,000 in the tax year, you will need to file a Self-Assessment tax return. If you’re unsure about your specific circumstances or how to pay tax, it’s best to get in touch with HMRC or seek advice from an independent financial or tax advisor.
Maximising your savings
If you are paying tax on your savings or think that you might need to in the future, it’s worth considering tax-efficient saving and investment options to ensure you’re getting as much value for your money as possible.
Pensions and ISAs are the most popular tax-free savings products, but Government-backed Premium Bonds through National Savings & Investment (NS&I) are another option. These don't accrue interest, but you have the chance to win tax-free cash prizes each month and your money will be 100% secure.
With this guide, you should have a better idea about whether you need to pay tax on interest from savings and how to work out how much that tax bill will be.
If you are gaining interest from P2P lending and think you need to pay tax, you can visit our help centre to find out how. Remember that interest earned on our Innovative Finance ISAs is always exempt from tax. Find out more about how IFISAs work.
Tax treatment depends on your individual circumstances and may be subject to change in future. If you have any questions on tax you should seek advice from an independent financial or tax advisor