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 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 and a tax-free personal savings allowance.
- Banks and building societies (since 6 April 2016) pay savings income gross (without tax being deducted).
- If you have lent cash to your own company it pays interest net of 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)
A starting rate applies to savings income up to a set band:
| Year | From 2015-16 to 2024-25 | 2014-15 |
| Rate | 0% | 10% |
| Band | £5,000 | 2,880 |
The SRB is subject to a complicated rule.
- The basic idea is that when savings income falls in the 0% savings band, it is taxable at the savings rate (0%), subject to your other income.
- The savings band is not available if your non-savings income (this excludes dividend income) exceeds the sum of the personal allowance (and blind person’s allowance if claimed) and the savings band.
The Personal Savings Allowance (PSA)
The PSA applies even if you do not qualify for the Starting Rate Band.
From 2016-17, the PSA 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?
2022-23
- 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.
2023-24
- 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.
2024-25
- 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 |
2022-23 |
2023-24 |
2024-25 |
| 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
| 2022-23 |
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 |
| 2023-24 |
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 |
| 2024-25 |
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.
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