How does the savings interest tax work?
Most people will not have to pay tax on their saving interest. And how much you pay will depend on what your total annual income is.
If you earn less than £17,570 from other income, like your wages, then your starting rate for tax-free savings interest is £5,000.
If you earn up to £50,270 in one year, you can earn £1,000 in savings interest that will be tax free. After that threshold, you pay 20% basic rate tax. The allowance for the savings interest comes from your Personal Savings Allowance, which excludes ISAs.
And if you earn more than £50,271 in a year, you can have £500 in savings interest that will be tax free. After that you pay the higher rate tax, which is 40%. Once your earnings go above £125,140, you have no tax free allowances for savings interest.
If you’re employed, HMRC will change your tax code automatically to charge you for savings interest. If you’re self-employed and fill out a self assessment then you have to report any savings interest you earn as part of your usual tax return.
You will need to pay tax on savings interest as soon as you have access to that interest. So if your interest is paid today – on 17 November 2023 – then it will be taxable in the 2023/24 tax year.
It’s also worth noting that it’s not just interest you earn from a savings account you opened at a bank or building society. Your allowance also covers interest from peer-to-peer lending, trust funds, life annuity payments, unit trusts, investment trusts and open-ended investment companies. Savings in ISAs and some national savings and investments accounts do not count towards your allowance.
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