Tax on savings income
If you get paid interest on your savings, make sure you understand whether you need to pay tax on it.
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When you put your money into a bank or building society account, it may earn interest. Interest is money the bank or building society pays you in recognition of the fact that they hold (and have use of) your money.
Normally, we might think of ‘income’ as something that is ‘earned’ – for example, income from your job or from self-employment. However, bank or building society interest is a form of passive (or ‘unearned’) income. It is taxed differently to earned income.
Allowances and nil-rate bands
If you have taxable savings income, there are three main allowances and nil-rate bands which can apply before you would normally owe any tax on that income. These should be considered in the following order:
- The personal allowance (£12,570 for 2023/24): this is deducted from your taxable income before tax is calculated. If you are eligible for the blind person’s allowance, this is treated in the same way.
- The starting rate limit for savings (£5,000 for 2023/24): this is a nil-rate band which applies only to savings income. It only applies if your non-savings and non-dividend income is below a certain threshold.
- The personal savings allowance (PSA) (£1,000 for basic-rate taxpayers): this is a further nil-rate band which applies only to savings income.
The above allowances and nil-rate bands together mean that, for 2023/24, if you have total taxable income of no more than £18,570, then you would generally not owe any tax on your savings income for that year (even if it was more than £1,000).
If you have non-savings income (for example, employment income or pension income) of more than £17,570 for 2023/24 and you are a basic-rate taxpayer for that year, you would generally only owe tax on your savings income if it exceeds £1,000.
If you still have taxable savings income after deducting the personal allowance and any available nil-rate bands (under the starting rate for savings and the PSA), then you would usually have a tax liability on that income at the rates which apply for savings income.
For 2023/24, these are the same as for earned income:
- The basic rate (20%)
- The higher rate (40%)
- The additional rate (45%)
The rate which applies depends on where the taxable savings income falls in your ‘stack’ of taxable income. For more information on this, see our Income tax page under the heading Order of taxation.
Deduction of tax at source
Banks and building societies do not generally deduct any tax at source from bank interest – it is paid gross.
The existence of the PSA means that paying interest gross delivers the right result in many cases. However, some people may need to notify HMRC about their untaxed, taxable savings interest.
If you owe tax on your savings income
If you owe tax on your bank and building society interest, and if you normally complete a tax return, then you can include the amount of savings income in the relevant section.
If you do not normally complete a tax return, you should tell HMRC about the taxable income by 5 October after the end of the tax year in which it arose (so 5 October 2024 for the tax year ending 5 April 2024). If they can, HMRC will take the extra tax you owe from your wages by changing your pay as you earn (PAYE) code. If they cannot adjust your tax code, or use data they already have to send you a bill at the end of the tax year (as described below), HMRC may ask you to fill in a tax return.
HMRC use information provided to them directly by banks and building societies about any savings interest income you receive. They may use this to send you a bill at the end of the tax year (the P800 form or simple assessment) and/or to amend your tax code.
You should check the figure very carefully, as the amount can be incorrect. For example, the figures for joint accounts may not be reported correctly (especially if the account is not held in equal shares), estimated amounts from prior years may be rolled forward, or figures can even be duplicated. If you are unsure, you should ask HMRC for a breakdown.
Note: you should not assume that HMRC will have a similar source of information on all types of income – for example, you always need to advise HMRC yourself if you have taxable dividend income.