- Last Updated: 18 March 2021
How do you tax interest? What is the Savings tax allowance?
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 taken).
- If you have lent cash to your own company it pay interest net of deduction of 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.
Subscribers to www.rossmartin.co.uk: see your detailed guide to this topic Savings income: tax on interest
The Starting rate band (SRB)
A starting rate applies to savings income up to a set band:
Year | From 2015/16 to 2021/22 | 2014/15 |
Rate | 0% | 10% |
Band | £5,000 | 2,880 |
The SRB is subject to a rather 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 (& 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 Savings Band.
From 2016/17 on the PSA exempts savings income within the allowance for basic and higher rate taxpayers.
- 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.
- Upper rate taxpayers have no personal savings allowance.
Bands and allowances
Year | Savings rate | SRB | PSA |
2016/17 onwards |
0% | £5,000 |
£1,000 basic rate payers £500 higher rate payers |
2015/16 | 0% | £5,000 | n/a |
2014/15 | 10% | £2,880 | n/a |
How does this work?
2018/19 example
- Jess earns £11,850 in employment income. Last year she sold her house, she earned £6,000 in interest on the proceeds which are still sitting in the bank.
- Her tax free personal allowance is £11,850 for the year.
2019/20-2020/21 example
- Jess has a new job and earns £15,500 this year. Her money was in savings for part of the year and she earned £4,000 in interest.
- Her personal allowance was £12,500 for both tax years.
2021/22 example
- Jess has had a raise and now earns £15,570 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 | 2018/19 |
2019/20 & 2020/21 |
2021/22 |
Non-savings income | 11,850 | 15,500 | 15,570 |
Less: personal allowance | (11,850) | (12,500) | (12,570) |
Amount to reduce SRB | - | 3,000 | 3,000 |
SRB before reduction | 5,000 | 5,000 | 5,000 |
SRB available | 5,000 | 2,000 | 2,000 |
Step 2: calculate tax due
2018/19 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable £ |
Non-savings | 11,850 | (11,850) | - | - |
Savings | 6,000 | - | (5,000) | 1,000 |
Tax rates | ||||
0% on | 1,000 | |||
Tax due | nil |
and
2019/20 & 2020/21 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable non-savings £ |
Taxable savings £ |
Total £ |
Non-savings | 15,500 | (12,500) | - | 3,000 | 3,000 | |
Savings | 4,000 | - | (2,000) | 2,000 | 2,000 | |
Total | 19,500 | (12,500) | (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 |
2021/22 |
Income £ |
Personal allowance £ |
SRB £ |
Taxable non-savings £ |
Taxable savings £ |
Total £ |
Non-savings | 15,570 | (12,570) | - | 3,000 | 3,000 | |
Savings | 4,500 | - | (2,000) | 2,500 | 2,500 | |
Total | 20,070 | (12,570) | (2,000) | 3,000 | 2,500 | 5,500 |
Tax calculation: | ||||||
0% tax on | 1,000 (PSA) | |||||
20% tax on | 3,000 | 1,500 | ||||
Tax due | 600 | 300 | 900 |
For further worked examples including the interaction with the dividend allowance, and examples covering all rates of taxpayer see Savings income: tax on interest.
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