How do you tax interest? What is the personal savings allowance?
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This is a freeview 'At a glance' guide to the taxation of savings income.
Savings income is interest earned, typically on a cash balance, whether paid to you by a bank, building society or any other source.
At a glance
- There is both a tax-free savings band (the starting rate band for savings) and a tax-free personal savings allowance.
- Banks and building societies (since 6 April 2016) generally pay savings income gross (without tax being deducted).
- If you have lent cash to your own company it will pay interest net of a deduction of 20% tax:
- See company guide: Interest paid to directors and individuals
- See director guide: Interest relief: Making a loan to a close company
- Savings income from qualifying ISAs is tax-free.
The Starting Rate Band (SRB)
When savings income falls in the £5,000 SRB, it is taxable at the savings rate (0%).
The scale of the SRB is subject to levels of other income (excluding dividend income): it is not always £5,000. The more non-savings income an individual has (e.g. wages/pension), the less the SRB will be.
- Every £1 of other income above the personal allowance (£12,570) reduces the SRB by £1.
- The savings band is not available if other income exceeds the sum of the personal allowance and the savings band (£17,570)
The Personal Savings Allowance (PSA)
The PSA applies even if you do not qualify for the SRB.
From 2016-17, the PSA effectively exempts savings income within the allowance for basic and higher rate taxpayers. The allowance is £1,000, reduced to £500 for higher rate taxpayers and £0 for additional rate taxpayers, meaning that:
- Basic rate taxpayers do not have to pay tax on the first £1,000 of their savings income.
- Higher rate taxpayers do not have to pay tax on the first £500 of their savings income.
- Additional rate taxpayers are fully taxable on their savings income.
Bands and allowances
| Year | Savings rate | SRB | PSA |
|
2016-17 onwards |
0% | £5,000 |
£1,000 basic rate taxpayers £500 higher rate taxpayers |
| 2015-16 | 0% | £5,000 | n/a |
| 2014-15 | 10% | £2,880 | n/a |
How does this work?
2023-24
- Jess earns £12,570 in employment income. Last year she sold her house and she earned £6,000 in interest on the proceeds which are still sitting in the bank.
- Her tax-free personal allowance is £12,570 for the year.
2024-25
- Jess has a new job and earns £15,570 this year. Her money was in savings for part of the year and she earned £4,000 in interest.
- Her personal allowance was £12,570 for the year.
2025-26
- Jess started a second part-time job and now earns £21,570 a year. Her money was in savings for part of the year and she earned £4,500 in interest.
- Her personal allowance was £12,570 for the year.
Jess's tax
Step 1: how much of the SRB is potentially available?
|
Year |
2023-24 |
2024-25 |
2025-26 |
| Non-savings income | 12,570 | 15,570 | 21,570 |
| Less: personal allowance | (12,570) | (12,570) | (12,570) |
| Amount to reduce SRB | - | 3,000 | 5,000 |
| SRB before reduction | 5,000 | 5,000 | 5,000 |
| SRB available | 5,000 | 2,000 | 0 |
Step 2: calculate the tax due
| 2023-24 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable £ |
| Non-savings | 12,570 | (12,570) | - | - |
| Savings | 6,000 | - | (5,000) | 1,000 |
| Tax rates | ||||
| 0% on | 1,000 | |||
| Tax due | nil |
| 2024-25 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable non-savings £ |
Taxable savings £ |
Total £ |
| Non-savings | 15,570 | (12,570) | - | 3,000 | 3,000 | |
| Savings | 4,000 | - | (2,000) | 2,000 | 2,000 | |
| Total | 19,570 | (12,570) | (2,000) | 3,000 | 2,000 | 5,000 |
| Tax calculation: | ||||||
| 0% tax on | 1,000 (PSA) | |||||
| 20% tax on | 3,000 | 1,000 | ||||
| Tax due | 600 | 200 | 800 |
| 2025-26 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable non-savings £ |
Taxable savings £ |
Total £ |
| Non-savings | 21,570 | (12,570) | - | 9,000 | 9,000 | |
| Savings | 4,500 | - | - | 4,500 | 4,500 | |
| Total | 26,070 | (12,570) | - | 9,000 | 4,500 | 13,500 |
| Tax calculation: | ||||||
| 0% tax on | 1,000 (PSA) | |||||
| 20% tax on | 9,000 | 3,500 | ||||
| Tax due | 1,800 | 700 | 2,500 |
For further worked examples including the interaction with the dividend allowance, and examples covering all rates of taxpayer see Savings income: How interest is taxed.
