What tax do I pay on savings income?

Updated on 7 April 2018

Savings income can come from a number of different sources. This section explains those sources and what tax you have to pay on them.

What is savings income?

Savings income includes interest from:

  • banks;
  • building societies;
  • National Savings and Investments (NS&I) accounts.

It also includes dividend income from:

  • company shares;
  • unit trusts;
  • open ended investment companies.

Savings income does not include property income. Income from letting out a property – also known as rental income – is non-savings income.

You can find out whether or not your savings and dividend income is taxable by looking at the ‘tax basics section’.

What tax do I pay on bank and building society interest?

For tax years starting on or after 6 April 2016, banks and building societies do not take off income tax before they pay you your interest. The interest is still taxable, and you might have to pay tax on it.

If you have an Individual Savings Account (ISA) with a bank or building society, you receive your interest tax free and you need not include the amount in your income when working out your tax. Interest from ISAs is not taxable income.

The amount of final tax due on taxable bank and building society interest will depend on your situation. As a:

  • non-taxpayer – you do not have to do anything (for tax years starting or or after 6 April 2016) as your interest from banks and building societies is paid tax-free (though for earlier tax years up to 2015/16, you might still be able to claim a repayment); or
  • starting rate for savings taxpayer – your interest is paid without tax being taken off so you do not need to do anything further (for tax years starting on or after 6 April 2016); or
  • savings nil rate taxpayer – your interest may fall within your personal savings allowance and be taxed, but at 0%. As from 6 April 2016 no tax will have been deducted at source, so you will not need to do anything further;

  • basic rate taxpayer – if your savings income is more than your personal savings allowance (or savings nil rate), you may have to pay more tax. This might be collected through your PAYE code or you could need to pay it direct to HMRC if that is not possible; or
  • higher rate taxpayer – if your savings income is more than your personal savings allowance (or savings nil rate), you may have to pay more tax. This could be collected through your PAYE code, HMRC might send you an assessment of your tax bill or you may have to complete a self assessment tax return.

There is more information in our section on ‘savings and tax’.

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What tax do I pay on my purchased life annuity?

Purchased life annuities are financial products purchased with a capital sum. They are designed to provide a guaranteed annual sum for life – normally for life, but it could be for a shorter term. That annual sum comprises two separate elements:

  • a capital element – a return of part of the original capital used to purchase the annuity – that is free from tax; and
  • an element of income. This income element is treated as savings income and is paid net of basic rate tax (20%).

Each year you will receive a statement showing the total sum paid to you, that is, the capital amount (non taxable), the income amount (taxable) and the tax deducted.

The final amount of tax due on your income from a purchased annuity will depend on your situation and whether or not the income falls within the starting rate for savings and the personal savings allowance (savings nil rate). Our ‘savings and tax’ guide explains more.

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What tax do I pay on gains from life insurance policies or investment bonds?

If you take out an insurance policy or investment bond, the profits you make on the policy or investment bond when you cash it in might be taxable. You should ask your financial adviser or a specialist tax adviser. You can find a tax adviser on the Chartered Institute of Taxation website. This section covers those policies where the profits, which are often called 'gains', are taxable.

Regular income

Each year you can withdraw tax free up to 5% of the amount you originally invested. If you do not withdraw your 5% in one year you can carry it forward. For example, if you have previously taken nothing out of the policy, in year three you could take 15% (3 x 5%). 

Any amounts you withdraw as an income will be taken into account when you cash in the policy and will make the end profit higher, so it is worth remembering this if you do not need to take out the money each year.

Part surrender

If you take more than 5% out (or the percentage you are allowed to take out, if you have 5% amounts brought forward from earlier years), you may trigger a taxable gain on the excess – even if the policy has not made a gain on its original investment, or has made a loss.

If the gain triggered appears to be excessive compared to the value of the investment and the amount cashed in, you should ask HMRC to recalculate the gain on a ‘just and reasonable’ basis. This ability to ask for a recalculation became law from 6 April 2017. For gains triggered before that date, HMRC should in any case be prepared to consider a recalculation of the gain following principles set through cases taken to the Tax Tribunal. See GOV.UK for the case of Joost Lobler v HMRC [2015] UKUT 0152 (TCC).

Cashing in the policy

You make a profit or gain on the policy if the amount you get when you cash it in is more than the amount of the premiums you have paid.

When you cash in the policy, any profit you make is free of capital gains tax. You can think of it instead as an 'income tax gain'. This is not the same type of gain that you make when you sell or give away an asset.

If you pay tax at the 0% starting rate for savings, savings nil rate or are a 20% basic rate taxpayer, you have no more tax to pay on the profit or gain you make. This is because the profit that you make on the policy is treated as having already suffered tax at 20%. It is not possible to get any of this tax back.

If you are a higher rate (40% in 2018/19) or additional rate (45% in 2018/19) taxpayer, you will have to pay extra tax. The profit on the policy is treated as the very top slice of your income. If you are a higher rate taxpayer, you will pay tax at 40% less the 20% tax that you are treated as having already paid. If the profit is likely to be taxable partly at 20% and partly at 40% there is a special relief called 'top slicing' available. Please contact HMRC if you think this is likely to apply to you, or you can read more about it in HMRC’s technical Insurance Policy Holder Manual.

You need to show the profits on your tax return if you need to complete one and you will receive details of the amount to be included from your insurance company. This is called a chargeable event gain certificate. If you do not receive a certificate you should contact the company and ask for one.

You should bear in mind that any life insurance profits count as your income when working out what married couple's allowances you may be entitled to. Even though you may still be a 20% taxpayer, the loss of married couple's allowance means you will effectively be paying more tax. You can see more about married couple's allowance restrictions in the 'pensioners section' section.

Policy pays out on death

If the policy pays out on your death, your estate will only pay tax on the difference between the surrender value and the premiums you paid, even where the total benefits paid out from the policy are more than the surrender value. This is so that you are only taxed on the profit you make from the investment up to the date of your death and not on any life insurance element – called mortality profit.

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What tax do I pay on dividends?

Our guide to tax on dividends can be found in our 'other tax issues section'.

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Where can I find more information?

You can find more information on the taxation of savings income in our section ‘savings and tax’.

If you want to claim tax back, in the first instance, look at our ‘tax basics section’.

We also have information to assist you in working out what tax rate applies to you.

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