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Do you have to pay tax on savings?

From stashing away money for a rainy day, to planning for retirement or working towards a specific financial goal, saving your hard-earned cash is a wise and responsible choice.

However, as you watch your savings grow, you might begin to wonder if you need to pay tax on the interest you earn from your savings account or the returns you get on your investments.

The amount of interest or returns you can make before paying tax depends on how much you earn from other incomes and what tax bracket this puts you in.

Your tax bracket will determine what your Personal Savings Allowance is, which is the amount you’re allowed to make in interest and investment returns each year before paying tax.

Follow our guide as we explain the must-know details about tax implications on savings accounts.

What is a Personal Savings Allowance?

A Personal Savings Allowance is the total amount of interest and investment returns you can make each year across all your bank accounts, except ISAs, without paying tax. This covers the interest you earn from all banks and building societies, not just one.

The Personal Savings Allowance applies to the same dates as the tax year, from the 6 April to 5 April the following year. That means the limit resets each year at midnight on 5 April.

Not everyone has the same allowance. The exact amount of Personal Savings Allowance that you have (ie the amount you can earn in interest/returns before tax) depends on the band of income tax that you’re paying, which depends on how much you earn.

The table below shows how much interest and investment returns you are allowed to make before you need to start paying tax. You’ll pay tax on anything above this limit. Remember, this doesn’t include interest/returns made in ISAs as these are tax-exempt.

When working out which Income Tax Band applies to you, remember to include any interest or investment returns you expect to make outside of ISAs as income.

Total income Income Tax band Personal Savings Allowance
Under £12,570 a year Personal allowance (no tax to pay on income) £1,000 a year
£12,571 to £50,270 a year Basic rate £1,000 a year
£50,271 to £125,140 a year Higher rate £500 a year
Above £125,141 a year Additional rate £0 (people earning this much money have no Personal Savings Allowance)

*Table shows figures for 2023/24 tax year, which may change in the future.

How much money can you have in savings without paying taxes?

There is no set amount you can have in your savings account before you need to pay tax. It all depends on how much interest you earn from your savings, or how much returns your investments make, as well as your annual income.

For example, you might have a large amount of money in a savings account, but with a low interest rate. Let’s say you have £40,000 in your account and your interest rate is 1%. In a year you’ll earn only £400 in interest, so unless your income is above £125,140 a year, you won’t need to pay tax on this money as it will be within your Personal Savings Allowance.

This also works the other way around. Let’s say that £40,000 is in an account that pays 5% interest. In a year, you’ll make £2,000. No matter which tax band you’re in, this will be above your Personal Savings Allowance so you’ll need to pay tax on anything over the limit. If you pay basic rate tax, then your allowance is £1,000 a year and you’ll need to pay tax on the extra £1,000.

If that £40,000 is in an ISA, you won’t pay any tax no matter how much interest or investment returns you make, as these are tax-exempt.

How do I calculate interest earned in a savings account?

There are a few different ways you can work out how much interest you’ve earned from your savings account in a tax year.

The easiest way to do this is to multiply your account balance by the interest rate. Just keep in mind that as the interest is added to your account, the following year you’ll have more money in the account to earn interest on. This is known as compound interest.

You could also go through all your bank account statements from the tax year and add up the interest payments you’ve received.

How much tax do you pay on savings?

If you’re eligible to pay tax on the interest you make on your savings, the amount you’ll pay will depend on your tax bracket.

Put simply, the interest you earn above your Personal Savings Allowance counts as income so is added to the amount you earn when your Income Tax band is worked out.

You can earn up to £12,571 a year without paying any tax. You’ll pay 20% tax on anything you earn that’s over this, up to £50,270 a year. Anything you earn above £50,270 a year will be taxed at 40%.

These are the tax brackets for 2023/24 and they may change in the future.

What counts as savings interest under the Personal Savings Allowance?

Your Personal Savings Allowance applies to the total interest or investment returns made from any number of different accounts in your name. This includes:

  • bank and building society accounts
  • savings and credit union accounts
  • unit trusts, investment trusts, and open-ended investment companies
  • peer-to-peer lending
  • trust funds
  • payment protection insurance (PPI)
  • government or company bonds
  • life annuity payments
  • some life insurance contracts

Any interest or investment returns you make on any type of ISA does not count towards your Personal Savings Allowance (including lifetime ISAs, junior ISAs, cash ISAs, stocks and shares ISAs or innovative finance ISAs).

How do you pay tax on savings?

If you need to pay tax on interest or investment returns, the process of doing so is thankfully straightforward!

At the end of the tax year, all banks and building societies report all untaxed interest they’ve paid out to HM Revenue and Customs (HMRC), which is the UK government’s tax department.

If you’re employed or receive a pension, 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 is 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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Want to take your savings to the next level? Look no further! At OneFamily, we are here to help you conquer the challenges you might face with building your savings. Dive into our Savings Insights page, where you can find the best savings advice and top tips waiting for you.

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