How much tax do I need to pay on my savings interest?

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Ah…tax. It can get a little complicated sometimes, but it’s important to understand how it works so you can help yourself avoid an unexpected tax bill. Recently, we’ve been getting asked how interest on your savings is taxed, so let’s break it down.

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Just remember, we’re not focusing on how your pension pot is taxed here. If you want to know more about that topic, you can find out more in our How much tax will I pay on my pension withdrawals? article (based on our understanding in April 2023).

Last thing before we get into it – the numbers we’re about to look at apply to the 2024/25 tax year.

How is my savings interest taxed?

You’ll probably be able to get some interest from savings without needing to pay tax on it. This is because you may be able to make use of one or more ‘tax allowance’. 

The personal allowance

Your ‘personal allowance’ is the amount of money you can earn in a tax year that you don’t need to pay tax on. For most people, this is £12,570.

Let’s say you earn £20,000 from your job each year. Since £12,570 is typically tax free, you’d usually only be taxed on £7,430. 

But how is this relevant to the tax you may have to pay on savings interest? Well, say you’re earning less than your personal allowance in the tax year from income (say, from your salary or from your pension pot). Whatever’s left over from your personal allowance can let you get some savings interest tax free.

Imagine you have the standard personal allowance of £12,570 and earn a yearly salary of £10,000. You’d still have £2,570 left over from your personal allowance – meaning you could earn £2,570 in savings interest and it would typically be tax free.

The starting rate for savings

People with lower incomes may also find themselves with the ‘starting rate for savings’. This means you can earn an extra £5,000 in savings interest in a tax year without having to pay tax on it. 

If you earn less than your personal allowance in a tax year from other income (again, things like your salary or pension pot), you can get the full £5,000. 

But for every £1 you earn above your personal allowance from other income, you’ll lose £1 of the starting rate for savings. 

Say your income is £15,000 and you have the standard personal allowance of £12,570. In this case, you’ve earned £2,430 more than the personal allowance. So your starting rate for savings would be £2,570 (because £5,000 - £2,430 = £2,570).

You’ll lose the starting rate for savings completely once your other income is above £17,570. 

The personal savings allowance

Finally, there’s the personal savings allowance. This is based on your tax band, and it can let you earn up to £1,000 of interest tax-free in a tax year. To figure out your tax band and therefore your personal savings allowance, you need to add all your other income to your savings interest.  

If you pay tax at the basic rate, or if you earn less than the personal allowance, you’ll get the full personal savings allowance of £1,000.

If you’re a higher-rate taxpayer, your personal savings allowance will be £500. 

And if you’re an additional-rate taxpayer, you won’t get any personal savings allowance.

Here’s a reminder of the different tax bands, how much income you need to have each year to fall into each band, and what your personal savings allowance will typically be. 

Tax band	Thresholds	Personal savings allowance
Basic rate (20% tax)	£12,571 to £50,270	£1,000
Higher rate (40% tax)	£50,271 to £125,140	£500
Additional rate (45% tax)	More than £125,140	£0

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Tax bands and rates are different in Scotland. But even if you live there, use the income tax bands for the rest of the UK when you’re calculating your personal savings allowance.

When am I taxed?

If your savings interest is above your allowance(s), you’ll be taxed according to whatever tax band you’re in. If you’re in Scotland, use the Scottish tax bands and rates.

You’ll be taxed on your interest in the tax year you’re able to access it in. So if you’ve got a fixed-term savings account and have agreed you can’t withdraw your interest until the term ends, you’ll be taxed in the tax year the money becomes available to you. 

If you need to fill out a Self-Assessment tax return, be sure to report your savings interest on there. If you don’t need to fill out a Self-Assessment tax return, the government will usually tax you automatically, or they may contact you to tell you how to pay. 

What kind of savings interest do these savings allowance(s) cover?

Your savings allowance(s) usually cover:

• Bank and building society accounts
• Savings and credit union accounts
• Unit trusts, investment trusts and open-ended investment companies
• Payment protection insurance (PPI)
• Trust funds
• Purchased life annuity payments (i.e. from an annuity not bought using a pension pot)
• Peer-to-peer lending
• Company or government bonds 

Your allowances won’t cover interest on savings held in Individual Savings Accounts (ISAs) or some types of National Savings and Investments (NS&I) accounts. This is because interest in ISAs and some NS&I accounts is tax free anyway.

In summary…

If you earn more than £17,570...

If you earn more than £17,570 a year, you’ll have used up all your personal allowance, and you earn too much to get the starting rate for savings. But you may still be eligible for the personal savings allowance depending on your tax band. You’ll have tax to pay if you exceed your allowance.

If you earn less than £17,570…

In theory, a person earning less than £17,570 a year could get £18,570 in savings interest without needing to pay tax. This would be the case if you hadn’t already used any of your personal allowance, you had the full starting rate for savings and you had the full personal savings allowance. 

It all depends on your circumstances. You’ll need to work out whether you have any personal allowance left over, and how much you’d get from the starting rate for savings and personal savings allowance. You’ll need to pay tax if you exceed your allowance(s). 

More information

If you want to find out more, you can check MoneyHelper.

If you’re unsure about the tax you may need to pay, it could be worth getting financial advice. 

 

The information here is based on our understanding in June 2024 and shouldn’t be taken as financial advice.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.