Savings account interest explained
What to know if you need to pay tax on your savings account?
In the UK, you can earn a certain amount in interest on your savings account before you need to pay tax. Your tax allowance, which is the amount you can make before you need to pay tax, depends on your other income, such as from your salary.
There are three things to consider when figuring out if and when you need to pay tax on your savings account interest:
- Your Personal Allowance
- Starting rate for savings
- Personal Savings Allowance
Let’s take a look at what each of these three means, and how they apply to you paying tax on the interest you earn from an easy-access savings account.
Your Personal Allowance
The standard personal allowance in the UK is £12,570. This is the basic amount you can earn in a tax year from work or other income, before you need to pay tax.
If you don’t use up this allowance, i.e. you earn less than the personal allowance, then you can use what’s left to earn interest on your savings account, tax-free.
Starting rate for savings
In some cases, you can get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
It only applies if you earn less than £17,570 in a year. If you earn more than this, you need not concern yourself with the starting rate for savings, because you’re not eligible.
You earn £17,000 of wages and get £300 interest on your savings.
Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.
The remaining £4,430 of your wages (£17,000 minus £12,570) reduces your starting rate for savings by £4,430.
Your remaining starting rate for savings is £570 (£5,000 minus £4,430). This means you will not have to pay tax on your £300 savings interest.
Personal Savings Allowance
Finally, there’s your Personal Savings Allowance, which is related to your income tax band. You can find out which tax band you’re in based on your income on the government’s website.
You can earn up to £1,000 in tax-free interest depending on your income tax band.
And so you can see, a little knowledge around your rights and allowances can really help you make the most of your savings.