If your savings or investments are bringing in extra income, you might need to pay tax to HMRC. But not necessarily!
Read on for a simple guide to who does and doesn't need to pay tax on their savings and investments.
What is the personal savings allowance and starting rate for savings?
The amount of savings/investment returns you can make before tax will depend on how much you earn and what tax bracket this puts you in.
Starting rate for savings
If you earn less than £17,570 a year, you can earn up to £5,000 a year in savings/investment returns before being taxed on it. This is known as the 'starting rate for savings'. Your exact limit will depend on the exact amount you earn.
- If you earn £12,570 or less, you'll get the full £5,000 allowance.
- Every £1 you earn above this, takes £1 off the £5,000 limit.
Personal savings allowance
If you earn more than £17,570, you won't be eligible for the starting rate for savings but will instead have a personal savings allowance.
Again, this is simply the amount of interest and investment returns you can make each tax year in total across all your bank accounts (except ISAs and other tax-exempt accounts) without paying tax.
Not everyone has the same allowance. The exact amount of personal savings allowance you have depends on the band of income tax that you’re paying, which depends on how much you earn.
You’ll pay tax on anything above this limit.
This doesn’t include interest/returns made in ISAs as these are tax-exempt.
The tax year runs from the 6 April to 5 April the following year. That means the limit resets each year at midnight on 5 April.
The table below shows how much interest and investment returns you are allowed to make before you need to start paying tax on it:
| Total income (incl pension income) | Income Tax band | Amount of interest and returns you can make tax free |
|---|---|---|
| £12,570 or under a year | Personal allowance (no tax to pay on income) | £5,000 a year (starting rate for savings) |
| £12,571 to £17,570 a year | Basic rate | £1,000 a year (personal savings allowance). Plus, starting rate for savings - every £1 above £12,570 takes £1 off the £5,000 starting rate for savings - so, £5,000 minus (your income minus £12,750) |
| £17,571 to £50,270 a year | Basic rate | £1,000 a year (personal savings allowance) |
| £50,271 to £125,140 a year | Higher rate | £500 a year (personal savings allowance) |
| Above £125,141 a year | Additional rate | £0 (people earning this much money have no personal savings allowance) |
Figures shown relate to 2024/25 tax year. May change in future. For more details, please see gov.uk.
How much money can you have in savings without paying tax?
There's no limit to how much money you can have in your savings account before you need to pay tax.
It depends on how much interest or investment returns you make, and what your personal savings allowance is.
For example, you could have a large amount of money in a savings account, but with a low interest rate that keeps your returns below your personal savings allowance. Then you wouldn't need to pay tax.
This also works the other way around. If you have only a small amount in your account but you're earning a high interest rate, or you've invested in a way that's making more than your personal savings allowance in returns, you may need to pay tax.
How do I calculate interest earned in a savings account?
The most accurate way to do this is simply to go through your bank statements and add together interest rate payments. Your bank might include a 'total interest earned this tax year' number on your statements.
How much tax do you pay on savings?
You'll pay tax on any interest or investment returns you make above your personal savings allowance (in accounts that aren't tax-exempt).
The rate of tax due on this money depends on your tax bracket.
- If your total income, including from savings interest/investment returns, is less than £50,270, you'll pay 20% tax.
- If your total income is above this, you'll pay 40% tax on your savings interest/investment returns.
These are the tax brackets for 2024/25 and they may change in the future.
How do you pay tax on savings?
If you’re employed or receive a pension, you don't need to do anything. HMRC will usually change your tax code and any tax due on interest/returns will simply come out of your pay or your pension.
If you’re self-employed, you’ll need to report any interest earned on savings or returns made on investments in your annual Self-Assessment Tax Return form.
Do you pay tax on children's savings?
Different rules apply to children’s savings accounts and, usually, this means there's no tax to pay on these accounts. However, there are a few exceptions to this.
You must tell HMRC if:
- The child gets more than £100 in interest from money given to them by a parent*. If this interest, plus whatever interest the parent makes on their own savings, takes them above their own personal savings allowance for the year, the parent will need to pay tax on it.
- A child themselves receives an income over their own personal allowance, for example if they’re getting money from a trust. Children are subject to the same Income Tax bands as adults, so can “earn” up to £12,571 each tax year before needing to pay any tax.
*The £100 limit doesn’t apply to money:
- Given to the child by anyone other than their parents (those with parental responsibility)
- Money in a junior ISA or child trust fund (as these are tax-exempt savings accounts)
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We're here to help you conquer any challenges you might face when building your savings.
Take a look at our guides to saving and investing, where we explain your options in everyday language to help you feel confident making decisions about your money.
