Do you have to pay tax on savings interest?


Interest rates on cash savings are currently the highest they’ve been in a long time which is great news for savers. However, if you’re earning interest on your savings, you may be liable to pay tax.

Paying tax on savings interest

You won’t pay any tax on the money you have saved, but you might have to pay tax on the interest you earn. Interest on your savings is usually paid gross which means tax isn’t deducted before it’s paid to you. The amount of tax you’ll pay depends on your Personal Savings Allowance and income tax band.

What is the Personal Savings Allowance?

Your Personal Savings Allowance is how much interest you can earn on your savings before paying tax. The allowance you get depends on your income tax band for the tax year. 

  • Basic rate taxpayers can earn up to £1,000 interest tax-free this tax year
  • Higher rate taxpayers can earn up to £500 interest tax-free this tax year
  • Additional rate taxpayers have £0 Personal Savings Allowance and will pay tax on all of the interest they earn on their taxable savings and investments 

How much tax will I pay on my savings interest?

Any interest you earn that exceeds your Personal Savings Allowance will be taxed at your marginal rate of income tax. 

  • Basic rate taxpayers earning up to £50,270 will pay 20% income tax
  • Higher rate taxpayers earning between £50,271 and £125,140 will pay 40% income tax
  • Additional rate taxpayers earning £125,140 or more will pay 45% income tax

It’s possible that the interest you earn on your savings could push you into the next tax bracket. For example, if you earn £50,000 per year and earn £3,000 interest on your savings, your taxable income for the year would exceed the basic rate tax band threshold of £50,270 and you could be liable to pay 40% tax on a small portion of your earnings above £50,270.

How can I avoid paying tax on my savings interest?

Aside from your Personal Savings Allowance, there are other tax reliefs and allowances you can use to avoid paying tax on the interest earned on your savings. Here are two options:

1. Individual Savings Accounts (ISAs)

Everyone gets an annual ISA Allowance of £20,000 per tax year which is separate to the Personal Savings Allowance and is not dependent on your income. The interest you earn on money saved in an ISA is tax-free regardless of how much interest you earn. 

There are 4 different types of ISA to choose from:

  • Cash ISA
  • Stocks & Shares ISA
  • Innovative Finance ISA
  • Lifetime ISA (you can only pay £4,000 into a Lifetime ISA per tax year)

You can use your £20,000 allowance to save into just one type of ISA or split your allowance across multiple ISAs. Although, you can only save into one of each type of ISA per tax year.

2. Pension

Another way to avoid paying tax on your savings is to maximise your annual pension allowance. The allowance for the 2023/24 tax year is up to £60,000. This is the maximum amount of money you can save into your pension each tax year without paying tax and while claiming tax relief on your contributions.

The amount of pension allowance you get depends on your total taxable income for the tax year, so if you’re a high earner you might have a pension allowance of less than £60,000.

Next steps

If you’re earning interest on your savings, be sure not to get hit with an unexpected tax bill. It’s important to check how much tax you’re liable to pay and if there is a more tax-efficient way for you to save. Through careful financial planning you can minimise your tax liability while protecting and growing your wealth.

At Grayson Lewis we help clients across the UK with a wide range of financial planning services. Get in touch to find out how we can help you to achieve your financial goals and lifestyle ambitions. 

Taxation rules can change at any time and are dependent on individual circumstances.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

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