Higher interest rates have been a boon for savers. However, you might be questioning whether you’re required to pay taxes on the interest you’ve earned, and how to go about it if you are liable.

According to online bank Marcus, 71% of people were not aware that the interest on savings could be taxed. With HMRC predicting that an extra 1 million taxpayers would be liable for tax on savings interest in 2023, some might face an unexpected bill.

Continue reading to discover essential information about taxes on savings.

If the interest your savings earn exceeds tax allowances, it could be liable for Income Tax

You have various allowances available to minimise the tax payable on the interest earned from your savings.

Personal Allowance

The Personal Allowance represents the total income you can receive before Income Tax becomes applicable. If your salary, pension, or other sources of income do not utilize the full Personal Allowance, you can apply it towards earning interest tax-free. For the tax year 2024/25, the Personal Allowance stands at £12,570. Therefore, it is advisable to review your various income sources to determine whether you might be liable for tax on interest.

Personal Savings Allowance

Moreover, many individuals benefit from a Personal Savings Allowance (PSA). If the total interest earned from your savings remains below this threshold, no Income Tax is due on that amount.

Your Personal Savings Allowance (PSA) varies based on your income tax rate. For the tax year 2024/25, it is as follows:

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers
  • £0 for additional-rate taxpayers. 

With rising interest rates, it’s easier than before to surpass the Personal Savings Allowance threshold, potentially making the interest liable for tax.

Indeed, according to Money Saving Expert, as of May 2024, the top easy access account is paying interest of 5.01%. That means basic-rate taxpayers could save £19,960 before they exceed the PSA. For higher-rate taxpayers, this falls to £9,980.

Starting rate for savings

You could receive up to £5,000 of interest without paying tax on it if your income from other sources is below £17,570 in the tax year 2024/25. This is referred to as the “starting rate for savings.”

If your income is below the Personal Allowance, your starting rate for savings is £5,000. However, this allowance is reduced by £1 for every £1 of income you have above the Personal Allowance. Therefore, if your income reaches £17,570 or more, you will not qualify for this allowance.

How to pay tax due on your interest from savings 

If you’ve discovered that your savings exceed these allowances, you will normally need to pay tax at your usual rate of Income Tax.

The good news is, you typically don’t need to take any action to pay tax on savings interest if:

  • You’re employed or receive a pension, HMRC will change your tax code, so the tax is automatically deducted
  • You usually complete a self-assessment tax return, you can report any interest earned on savings when completing your return
  • You’re not employed, do not receive a pension, or do not complete a self-assessment tax return, your bank or building society will inform HMRC how much interest you’ve received at the end of the tax year. HMRC will contact you if you need to pay tax.

However, if the total income from savings and investments is more than £10,000 in a single tax year, you will need to register for self-assessment. So, it’s important to be aware if the amount you receive could exceed this threshold. 

An ISA could be a useful way to make your savings tax-efficient 

If the interest earned on your savings might be subject to Income Tax, an ISA could be a beneficial option.

For the tax year 2024/25, you can contribute up to £20,000 to ISAs, offering a tax-efficient means to save and invest. Interest earned within an ISA is exempt from Income Tax, making it a valuable tool for growing your wealth.

You could also opt for a Stocks and Shares ISA, where your money would be invested. Once again, investing through an ISA is tax-efficient, as your returns will not be liable for Capital Gains Tax. However, you should note that investment returns cannot be guaranteed. Before investing, you may want to consider your risk profile, investment time frame, and how investing could fit into your financial plan.

Contact us to discuss how to make your savings tax-efficient 

Please get in touch with us to explore strategies for optimizing the tax efficiency of your savings. Depending on your situation, there may be additional measures you can consider to lower your overall Income Tax liability. Contact us today to discuss these options and integrate them into a comprehensive financial plan.

Please note: This blog is for general information and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down and up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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