This is a freeview 'at a glance' guide to the taxation of savings income.

How do you tax interest? What is the Savings tax allowance?

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 pays 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: How interest is taxed

The Starting Rate Band (SRB)

A starting rate applies to savings income up to a set band:

Year	From 2015-16 to 2022-23	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.

• 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 have no personal savings allowance.

Bands and allowances

Year	Savings rate	SRB	PSA
2016-17 onwards	0%	£5,000	£1,000 basic ratepayers £500 higher ratepayers
2015-16	0%	£5,000	n/a
2014-15	10%	£2,880	n/a

 

How does this work?

2020-21

• Jess earns £12,500 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 £12,500 for the year.

2021-22

• 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.

2022-23

• 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	2020-21	2021-22	2022-23
Non-savings income	12,500	15,570	21,570
Less: personal allowance	(12,500)	(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

2020-21	Income £	Personal allowance £	SRB £	Taxable £
Non-savings	12,500	(12,500)	-	-
Savings	6,000	-	(5,000)	1,000
Tax rates
0% on				1,000
Tax due				nil

 

2021-22	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

 

2022-23	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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