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Income Tax – savings income

Introduction

This briefing explains how income received from savings is taxed including the various rates and allowances.

Core considerations  

  • Interest on savings is taxable as savings income.

  • The personal allowance can be used against savings income.   

  • The Starting Rate for Savings is restricted by non-savings income (such as employment income) and will not be available where there is non-savings income of £17,570 or more.

  • The Personal Savings Allowance allows individuals to earn up to £1,000 of interest tax free.

Contents

What is savings income?

Savings income is interest that individuals receive from their savings. The amount of tax that they will pay depends on other income they receive during the tax year and whether the savings income falls within any allowances available to them.

Interest paid by banks and building societies is paid gross, without tax being deducted. Individuals will therefore be responsible for determining if there is any tax to pay on the amount they receive. Interest earned in an ISA and some National Savings and Investment accounts are tax exempt and do not need to be considered when calculating an individual’s liability to savings tax.

There are several allowances that individuals can use before paying tax on savings income. These are the Personal Allowance, the Starting Rate for Savings, and the Personal Savings Allowance.
 

The Personal Allowance

Some or all the personal allowance can used against savings income before it is taxable.
 

The Starting Rate for Savings

On 6 April 2015, the 0% Starting Rate for Savings, up to £5000 of savings income was introduced. The Starting Rate for Savings is reduced by £1 for every £1 of non-savings taxable income, such as employment income. This means if an individual has non-savings income of £17750 or more, they will not be eligible to use the Starting Rate for Savings Allowance. Dividend income does not affect this because it is taxed after savings income.

For example - where the Starting Rate for Savings can be used

Magnus earns £16,000 as a salary and £1500 interest on his savings. His personal allowance of £12,570 is used against his salary and the balance of £3,430 is taxed at basic rate. This amount will also reduce his starting rate for savings by £3,430, and leaves him with £1,570 (£5,000 minus £3,430), where tax at 0% is applied. As Magnus has £1500 of savings income, he will not have to pay tax on this.

 

For example - where the Starting Rate for Savings can’t be used

Tess earns £21,570 a year and £4,500 in interest on her savings. Her personal allowance of £12,570 leaves £9,000 of her salary (£21,570 minus £12,570) taxed at basic rate and reduces her starting rate for savings to £0 (because £9,000 is £4,000 above the Starting Rate for Savings Allowance of £5,000). Tess will need to pay income tax on her savings interest, which she can set her personal savings allowance (see below) against some of it.


The Personal Savings Allowance

The Personal Savings Allowance was introduced on 6 April 2016 which is an additional allowance to the Starting Rate for Savings. Since the introduction of this allowance, banks and building societies have stopped deducting 20% tax from bank interest and it is now paid gross. 

The Personal Savings Allowance allows individuals to earn up to £1,000 of interest and not have to pay income tax on it. For joint accounts, interest will be split equally between the account holders. 

The amount of allowance available to an individual will depend on the income tax band they are in.

Income Tax Band Income Tax Rate
(2024/2025)		 Personal Savings Allowance
Basic rate tax band 20% £1,000
Higher rate tax band 40% £500
Additional rate tax band 45% £0

To work out an individual’s tax band, all the interest they have received is added to their other income. Interest from savings still counts towards income as a whole and could, therefore push the individual into the higher rate tax band. If this happens, the level of Personal Savings Allowance the individual is entitled to will reduce and the income tax on any interest over their allowance will be taxed at the higher tax band.

This means if an individual is a basic-rate taxpayer and they earn enough interest from savings to be pushed into the higher-rate tax threshold, they will only be entitled to a £500 Personal Savings Allowance, and they will pay 40% tax on the remainder of the savings income that is in the higher tax bracket.

For example - basic rate taxpayer

Harry earns £20,000 a year and receives £250 in bank account interest. He will not pay any tax because it is less than his £1,000 allowance. If instead Harry received £1,500 in bank account interest he will pay tax on £500 (the amount over the £1000 allowance), at 20% basic rate of tax.

 

For example - higher-rate taxpayer

Krzytov earns £60,000 a year and receives £250 in bank account interest. As a higher rate taxpayer he will be entitled to a £500 Personal Savings Allowance which covers his £250 interest and will not pay any tax on it. If instead Krzytov received £1,100 in bank account interest – he will not pay tax on his interest up to £500. But he will pay 40% higher rate tax on the £600, the amount over the allowance.

 

For example - additional-rate taxpayer

Marilyn earns £130,000 a year and receives £250 in bank account interest – she will need to pay additional rate tax (45%) on all of the interest because she is not entitled to the Personal Savings Allowance. 


Interaction of the Starting Rate for Savings and the Personal Savings Allowance

Returning to Tess in our previous example, she was not entitled to the Starting Rate for Savings as she had non-savings income of £9000 above her personal allowance – wiping out the £5000 Starting Rate for Savings allowance. But she will still be entitled to the Personal Savings Allowance which as a basic rate taxpayer is £1,000. This will reduce the taxable element of her savings interest to £3,500 (£4,500 interest less £1000) giving her a tax liability on the interest of £700 (£3,500 x 20%).
 

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