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.