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

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 ratepayers

£500 higher ratepayers

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 the 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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