Savings and tax

What is bank or building society interest?

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.

Interest counts as income for tax purposes on the date it is credited to your account. Most bank and building society income is taxable.

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.

How is bank and building society interest taxed?

Most people will have no tax to pay on interest they receive from a bank or building society account due to the ‘personal savings allowance’ (PSA) of £1,000 (or £500 for higher rate taxpayers). Additional-rate taxpayers are not entitled to any PSA.

Savings income that falls into your PSA is taxable at 0%, which means you have no tax to pay on it.

Beyond the PSA the basic rate of 20%, the higher tax rate of 40% or the additional rate of 45% may apply, unless the income is specifically tax free. When looking at which rate band may apply to your savings income, you should remember that savings income is taxed after most other types of income, apart from dividend income.

For a basic example of how the PSA works, see Henry.

If you are a Scottish taxpayer, or if you are a Welsh taxpayer, you pay tax according to UK rates and bands on your savings income. For information on how the PSA works for Scottish and Welsh taxpayers, see below.

Note that income within your PSA is counted as taxable income (albeit taxable at 0%) and so still counts towards your basic or higher rate limits – and may therefore affect things like the amount of PSA that you are entitled to in the first place, the rate of tax that is due on any savings income you receive in excess of this allowance and the rate of tax you pay on dividend income (see What tax rates apply to me? for more information). See the example of Magda.

In addition, because savings income falling within the PSA is still counted as taxable income (albeit taxable at 0%) it is counted as income for tax credits purposes. For universal credit purposes, the actual income is ignored and you are deemed to have ‘tariff’ income if your total savings exceeds a certain threshold. For more information, see our page on universal credit.

Please also note that the PSA comes on top of the normal personal allowance (£12,570 for 2023/24) and the starting rate for savings (£5,000 for 2023/24). These two things taken together mean that anyone with total taxable income in 2023/24 of less than £17,570 (for example, from wages, profits, pensions and savings – not including dividends) will generally pay no tax on their bank or building society interest in 2023/24, even without the PSA. The £17,570 figure can be higher if you get blind person’s allowance, marriage allowance or married couple’s allowance.

For an example of how the starting rate for savings interacts with the PSA, see Mo.

You can find basic government information on the personal savings allowance on GOV.UK.

What happens if I have to pay tax on my savings interest?

Most people with bank and building society interest will not have to pay tax on their savings income due to the PSA. Banks and building societies do not deduct any tax at source from bank interest – it is paid gross.

The existence of the PSA and the fact that banks and building societies do not deduct tax at source means the tax position for most people who have modest amounts of savings income is straightforward and delivers the right result in the majority of cases. However, it also means that some people need to notify HMRC about their untaxed, taxable savings interest.

If you do have to pay 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, they may send you a bill at the end of the tax year or 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 contact HMRC to ask them for a breakdown.

Please note that 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.

More detail on the personal savings allowance

How much is my personal savings allowance?

For most basic-rate taxpayers, the personal savings allowance is £1,000. We provide further detail here.

What other types of savings income does the personal savings allowance apply to?

As well as interest on bank and building society accounts, the personal savings allowance (PSA) applies to other types of savings income, such as:

• interest from accounts with providers such as credit unions and certain National Savings and Investments (NS&I) products
• interest included in payments of compensation for mis-sold financial products, such as payment protection insurance (PPI)
• interest distributions from authorised unit trusts, investment trusts and open-ended investment companies
• income from corporate bonds and gilts (government bonds)
• the interest element of income from certain purchased life annuities, profits from deeply discounted securities; profits under the accrued income scheme
• gains from certain life insurance contracts
• foreign interest, unless it is relevant foreign income for remittance basis purposes (that is, where the remittance basis applies in the tax year and the interest is remitted to the UK)

Some of the above sources have tax deducted at source.

For example, tax is deducted automatically from certain forms of savings income such as interest distributions from authorised unit trusts and open-ended investment companies. This is because HMRC think that investors in collective investment schemes are more likely than bank or building society depositors to be higher or additional rate taxpayers, and more likely to receive amounts in excess of the PSA. Tax is also deducted from interest paid on compensation, for example in the case of mis-selling of PPI, as this is likely to be a large one-off amount and may exceed the PSA.

If the tax deducted at source turns out to be excessive, you may be able to claim the tax back by filling in form R40 (or form R43 if living overseas) and sending it to HMRC. More information about this is available on our page How do I claim back tax on savings income?. We have also published separate guidance on how to claim back tax deducted at source on PPI pay-outs.

If you are unsure as to the extent to which your savings income is taxable, you may need to seek professional advice. We tell you how you can find a tax adviser in our Getting Help section.

My bank account pays ‘rewards’: does the personal savings allowance apply to them?

The PSA applies only to savings income as defined by law. This means that even if you receive income that you think of as savings income, if it is not within the definition, it is not eligible for the PSA. Equally, it is not eligible for the starting rate of savings.

The situation can be very confusing in relation to certain types of ‘reward’ accounts which banks may offer. If you receive any interest (whether on the reward account or on a different account), you should receive that gross and it will be eligible for the PSA. The treatment of ‘rewards’ however depends on the nature of the reward. It is very possible that you will receive the reward net of 20% tax; in addition, the reward may not be eligible for the PSA. There is often limited guidance available from the bank, and the nature of the reward can vary from account to account.

Please note that we are talking about regular cash rewards here as opposed to cash incentives for people switching their accounts or cashback on certain types of spending, which are generally not taxable as they are considered a 'discount' rather than a reward.

If you have a reward account, to check the tax position, you need to find out the following information:

• the type of reward;
• whether the bank pays you the reward gross or net of tax (and if net, how much tax is deducted at source);
• whether the reward is taxable income; and
• whether the reward is potentially eligible for the PSA, depending on your circumstances.

There are three main possible tax treatments, depending on the type of reward:

1. If the reward takes the form of interest (that is, a rate based on the account balance), it is savings income and eligible for the PSA. Banks should pay this to you gross without deducting 20% tax at source, but it is still taxable income.
2. If the reward takes the form of a cash reward (not related to the account balance), for say depositing a certain amount per month, this is not savings income, but is probably an ‘annual payment’ (applicable even if reward is paid monthly). Banks must deduct tax at 20% before paying you the cash reward, and the gross amount of the cash reward is taxable. Since annual payments are not savings income, these types of reward are not eligible for the PSA (or the starting rate for savings). If you are not liable to tax you can reclaim any tax deducted by completing an R40 form or on your Self Assessment tax return. If you are a higher-rate taxpayer you would need to pay the extra amount to HMRC, for example, via a PAYE coding adjustment or through your tax return.
3. If the reward takes the form of a cash reward (not related to the account balance) and there is a fee for the account, the reward does not meet the conditions for an annual payment. It is still taxable, however as a 'miscellaneous payment'. Banks do not have to deduct tax before paying you the cash reward, so you receive these rewards gross and the gross amount is taxable. These types of reward are not savings income, so they are not eligible for the PSA (or the starting rate for savings). If you are a basic, higher-rate or additional-rate taxpayer you would need to pay any tax due to HMRC, for example, via a PAYE coding adjustment or through your tax return.

What does the personal savings allowance mean for cash ISAs and other tax free savings products?

If you have a cash Individual Savings Account (ISA), the interest you get is tax free. ISA income does not count towards the PSA.

There are also a number of NS&I products, backed by the Treasury, which are expressly free of tax, for example, fixed interest and index-linked National Savings Certificates and Premium Bonds. Income or prizes from these products do not count towards the PSA either.

You can find more information about NS&I products on the NS&I website.

How does the personal savings allowance apply to a joint account?

Both account holders are entitled to a personal savings allowance, to use against their share of the interest.

Can you tell me more about ISAs?

You can save tax free with Individual Savings Accounts (ISAs). They are available to individuals who are resident in the UK. An overview of the different types of ISA is given below.

You do not need to tell HMRC about income you get from ISAs. ISA income does not count towards the personal savings allowance. There is more on ISAs on GOV.UK including information on eligibility for an account.

Across all types of ISA (except Junior ISAs), the maximum you can put in, during 2023/24, is £20,000.

If you have a child trust fund which has matured, you can transfer this into an ISA without reducing your annual ISA subscription limit.

If you are interested in opening an ISA, interactions with means-tested benefits should be considered. Unlike saving into a pension, money saved in ISAs is counted as capital and can affect a claim to benefits like universal credit. You should also make sure you understand when you can take your money out and for what purpose and whether the investment is suitable for your circumstances. Consider seeking financial advice – the Financial Conduct Authority gives guidance on finding an adviser.

Please note that special rules apply where your spouse or civil partner dies and they had ISA holdings at their date of death. See our bereavement guidance for more information.

Cash ISAs

Cash ISAs are relatively straightforward cash accounts on which you can earn tax-free interest on your cash savings if you are aged 16 or over.

You can withdraw money from cash ISAs whenever you like without a penalty from the government. However, if you have a ‘fixed-term’ cash ISA, then you will need to check to see whether you can access funds before the end of the fixed term. Even if you can, your ISA provider may charge a penalty for an early withdrawal.

Cash ISAs may be ‘flexible’ or ‘not flexible’. If the ISA is flexible, then you can withdraw money from an ISA and return it in the same tax year without the funds counting towards the £20,000 subscription limit when they are returned. Not all ISAs are flexible, so you should check with your provider.

Stocks and shares ISAs

You need to be 18 or over to have a stocks and shares ISA.

With stocks and shares ISAs, you can sell the assets at any time with no penalty and there is no minimum length of time you need to hold them. There is no capital gains tax on selling the investments within a stocks and shares ISA. Equally, if you sell the investments at a loss (that is, for less than they were bought for), you cannot get tax relief for the loss.

However, unlike flexible cash ISAs, if you take the sale proceeds out of the account and then re-invest these funds, this will count towards your ISA subscription allowance.

Innovative Finance ISAs

Innovative Finance ISAs allow individuals aged over 18 to invest in peer-to-peer loans rather than cash or stocks and shares.

You may not be able to easily access funds held in an Innovative Finance ISA if they are allocated to a loan. You should check with the provider. A fee may be payable.

Like stocks and shares ISAs, if you withdraw money from the ISA then re-invest these funds then it will count towards your ISA subscription allowance.

Lifetime ISA

You can open a Lifetime ISA if you are aged 18 or over but under 40. They aim to help you build a deposit for your first home or save until age 50 for retirement (usually drawing on the savings from age 60).

The government pays a tax-free bonus of £1 for every £4 saved into a Lifetime ISA, so somebody who saves the maximum £4,000 a year will get an extra £1,000. If you are a basic rate taxpayer, this is the same amount as you might get in tax relief if you put £4,000 into a relief-at-source pension.

If you wish to withdraw Lifetime ISA funds other than to buy your first home or after you have reached age 60, or if you are terminally ill, then you must normally pay a penalty equal to 25% of the amount withdrawn. This can mean that you get back less than you invested.

For example, if you invested £4,000 in a Lifetime ISA and received a government bonus of £1,000, you would have £5,000 in the account if the value of the investment has not changed (and assuming the provider has not made any charges). If you wanted to close the account now, you would only get back £3,750 as the 25% withdrawal penalty would apply (£5,000 x 25% = £1,250 penalty).

There was a temporary reduction of the 25% withdrawal penalty for withdrawals made between 6 March 2020 and 5 April 2021.

Note also the age restrictions on Lifetime ISAs. If you opened one before the age of 40, you can keep saving up to age 50. But if you are now aged 40 or over, you will not be able to open a new Lifetime ISA. If you withdraw funds, you might therefore want to consider keeping a Lifetime ISA open if you might want to invest in it in the future. Check with your provider if you can keep it open – even if with a small amount left in the account.

The £4,000 limit for the Lifetime ISA, if used, forms part of your overall £20,000 annual ISA limit.

Help-to-Buy ISAs

Help-to-Buy ISAs were introduced from 1 December 2015 and could be opened until 30 November 2019. They are a type of ISA designed to help first-time buyers save up for a deposit for their new home with the government adding a tax-free bonus of up to 25% to all money saved (provided you save a minimum of £1,600, up to a maximum bonus of £3,000). The maximum monthly deposit is £200 each calendar month. It was possible to deposit an additional £1,000 when the account was first opened.

If you have a Help-to-Buy ISA, you can transfer those savings into a Lifetime ISA or you can continue to save into both. However, you can only use the bonus from one of the ISAs to buy a house. Furthermore, if you now transfer Help-to-Buy ISA savings into a Lifetime ISA they will count towards the £4,000 contribution limit.

You can access funds from a Help-to-Buy ISA without paying a charge on withdrawal. However, note that you may not be able to put the money back in – monthly deposits are limited to £200, regardless of whether you have made a withdrawal. Taking money out may therefore affect the bonus which can be built up, and if you take all the money out, you will not be able to open a new one as the scheme closed on 30 November 2019. Note, however, that if you meet the criteria, you might be able to open a Lifetime ISA instead (see above).

For more information, please see the government FAQs.

Junior ISAs

There are also Junior cash ISAs and Junior stocks and shares ISAs for children under 18 years old. A child can have both types of Junior ISA, provided they do not exceed the annual Junior ISA allowance (£9,000 for 2023/24).

The money in either type is not accessible until the child is 18, other than on terminal illness or death of the child.

Help-to-Save accounts

Help-to-Save was introduced in September 2018. It is not an ISA, but it is aimed at supporting people on low incomes to build up savings.

For more information on Help-to-Save, see our separate guidance.

Can you tell me more about credit unions?

A credit union is a financial co-operative. They were traditionally owned and run by members who have a common interest, such as where they live or work; but these days, some have broader membership rules.

From October 2019, some credit unions have been offering a ‘win while you save’ account known as a PrizeSaver account. It is possible to win up to £5,000 a month by saving from just £1 a month into these accounts. HMRC have confirmed to us that the winnings paid in these accounts are not treated as taxable income and can therefore be ignored for income tax purposes. However, please note the winnings will be treated as capital for universal credit and your universal credit award would be affected if your total capital exceeds £6,000. If you are in receipt of tax credits or benefits, you should check with the relevant department to confirm how any prize is treated for that specific benefit.

Other than this PrizeSaver account, returns on credit union savings may be by way of a ‘dividend’ or interest. Both types are treated as interest income for tax purposes despite the first being called a ‘dividend’. Credit unions do not have to deduct any tax at source from savings income. Credit union savings income falls within the PSA.

What is a dividend?

If you invest in shares in a company, there are two ways you can earn money. They can grow in value, allowing you to make a gain when you sell them. Companies also distribute the profits they make in the form of a dividend. This is known as dividend income.

How is dividend income taxed?

You do not have to pay tax on dividend income which falls within the dividend allowance for that tax year. For 2022/23, the dividend allowance was £2,000 (see GOV.UK for earlier years). For 2023/24, the dividend allowance is reduced to £1,000. It is expected to be reduced further to £500 per year from 2024/25 onwards, but this has not yet been confirmed. 

The dividend allowance is available to anyone no matter how much non-dividend income they have.

To the extent that dividend income falls into your dividend allowance, it is taxable at 0%, which means you have no tax to pay on it.

For divident income above the dividend allowance, in 2023/24 dividends are taxed at 8.75%, 33.75% and 39.35% on basic, higher and additional rate taxpayers respectively. When looking at which rate band may apply to your dividend income, you should remember that dividend income is normally treated as the top slice of taxable income.

If you are a Scottish taxpayer, or if you are a Welsh taxpayer, you pay tax according to UK rates and bands on your dividend income. For more information on how the dividend allowance works for Scottish and Welsh taxpayers, see below.

Taxpayers are not required to notify HMRC of their dividend income if dividends fall within the dividend allowance for that year. However, taxpayers whose dividends are not covered by the dividend allowance have an obligation to notify a liability to pay tax to HMRC (those in Self Assessment should instead include the amount of dividend income in the relevant section of their tax return).

Please note that income that is within your dividend allowance is counted as taxable income (albeit taxable at 0%) and so counts towards your basic or higher rate limits and may therefore affect the amount of PSA that you are entitled to and the rate of tax you pay on dividend income that exceeds your allowance (see What tax rates apply to me? for more information). This is shown in the example of Serenna.

In addition, because the income is still counted as taxable income (albeit taxable at 0%) it is counted as income for tax credit purposes. For universal credit, dividend income is ignored and your shares are treated as capital. If you have total capital above a certain threshold, you are deemed to have ‘tariff’ income. Please see our page on universal credit for more information.

For some detailed examples of how the personal savings allowance, starting rate for savings, personal savings allowance and dividend allowance interact, see the examples of Eric and Finlay.

I give to charity under Gift Aid, is there anything I should note about the personal savings allowance and dividend allowance?

Many people do not pay tax on their savings and dividend income due to the personal savings and dividend allowances. This might mean that you have not paid enough tax to cover the tax that a charity can reclaim if you made Gift Aid donations.

If you donate to charity under a Gift Aid declaration, the charity will assume the donation has come from someone paying tax and claim an amount back from HMRC. You might then be faced with a bill from HMRC for the amount they have claimed.

This could mean that you need to consider your tax position carefully before you sign up to a Gift Aid declaration (or continue with regular donations under Gift Aid). Check your tax position each year to make sure you pay enough tax to cover the tax element of your donation.

If you do not pay enough tax to cover this, you can still donate to charity, but the charity cannot claim Gift Aid relief from HMRC. You should also bear this in mind when visiting attractions, which invite you to Gift Aid your ticket entry.

Should I transfer savings or shares to my partner?

Members of a married couple or a civil partnership are taxed separately so each spouse or partner is potentially entitled to a personal allowance, a personal savings allowance, a dividend allowance, etc.

To take best advantage of being taxed separately, it may be sensible for tax purposes to transfer savings or shares to your partner as this can save tax on the attributable interest or dividends if you are part of a couple where one person has spare capacity in their allowances or is in a lower tax band than the other. You will need to bear in mind, however, that transferring legal ownership of property to your spouse or civil partner might have other impacts – for example, the revised ownership might be taken into account on a separation or divorce. If you are concerned about these other impacts, you should take legal advice.

Also, if you transfer shares to your partner, this is a disposal for capital gains tax purposes. If you are not married or in a civil partnership when the shares are transferred, there may be capital gains tax to pay on the transfer. There will be no capital gains tax to pay if you are transferring (that is, gifting) a cash balance in pounds sterling, whether or not you are married or in a civil partnership.

If you have savings or shares held in joint names between you and your spouse or civil partner, by default 50% of the income (that is, the interest or the dividends) arising is treated as taxable on you and the other 50% is taxable on your spouse or civil partner. This is the case even if the underlying beneficial entitlement is unequal (for example, if only one spouse or civil partner funds the savings account or purchases the shares). However, you may both elect, on form 17, to be taxed in accordance with your respective beneficial interests instead, if these are unequal. The election is irrevocable and may only be backdated 60 days.

By contrast, note that joint owners of property (such as a joint bank account or jointly-held shares) who are not married or in a civil partnership, or in partnership, are taxed on the share to which they are entitled. In most cases this will be 50:50, even if contributions to the account are unequal.

There is more information about the tax consequences of entering into a marriage of civil partnership in our news article, Thinking of entering into a civil partnership? Make sure you understand the tax consequences – both positive and negative!.

How do the personal savings allowance and dividend allowance work for Scottish and Welsh taxpayers?

If you are a Scottish taxpayer, you can find out more about Scottish income tax in the tax basics section.

Scottish rates and thresholds apply to non-savings and non-dividend income only; a Scottish taxpayer pays income tax according to the UK rates and bands on their savings and dividend income.

Therefore, a Scottish taxpayer who has both earned income, such as employment salary, pension, profits from self-employment or rental profits, and taxable savings income, such as bank interest may have to consider both the UK rates and thresholds and the Scottish rates and thresholds in order to work out their income tax liability.

There is an example of how this may affect you if you are a Scottish taxpayer in the tax basics section.

In 2023/24, Welsh taxpayers pay the same rates of income tax as taxpayers in England and Northern Ireland. For more information, see What is Welsh income tax?.

How do the personal savings allowance and dividend allowance interact with the taxation of state pension lump sums?

If you deferred claiming your state pension, having reached state pension age before 6 April 2016, when you do decide to take your state pension you may be able to claim a state pension lump sum.

If you do take such a lump sum, when working out what rate of tax you should pay on it, the special rates that are used to tax savings income and dividend income falling within the basic rate band – the starting rate for savings, personal savings allowance and dividend allowance – are ignored.

Therefore, if your total taxable income falls within the basic rate band (even if some of that income is taxed at 0% due to it being taxed at the savings and dividend rates), you will pay tax at 20% on your state pension lump sum.

Please see What tax do I pay on my state pension lump sum? for more information.

HMRC have written to me about money I have invested offshore – what should I do?

You may have received a letter saying that HMRC’s information indicates you currently have or previously had offshore income or gains, and if you have additional tax to pay, to tell HMRC using the Worldwide Disclosure Facility. If this applies to you, we strongly recommend you seek advice as HMRC may seek to charge harsh penalties for the non-compliance.

Can you tell me about life insurance policies?

Life insurance is something you might come across if you are looking into tax-efficient savings and investment options. Some life insurance is designed to be an investment – a place to store and grow your money rather than just pay out when you die. The life insurance companies invest your money and when your investment matures, it might pay out a profit. Insurance policies are either qualifying or non-qualifying.

Qualifying policies are generally long-term policies where regular sums are paid in. There is typically no tax when a qualifying policy matures. MoneyHelper has more information on qualifying policies.

Non-qualifying policies tend to be policies which are funded by a single premium rather than regular contributions. They are much more likely to give rise to tax consequences when they mature. We explain how to work out if tax on non-qualifying policies due in our pensioners section.

Examples 

Henry: personal savings allowance

In the 2023/24 tax year, Henry earns £25,000 and has savings income of £600. He has to pay tax at 20% on £12,430 of his earnings (the amount left once his £12,570 personal allowance is used) however his savings income is tax free due to his £1,000 personal savings allowance.

If his savings income was £1,250 instead of £600, he would have 20% tax to pay on £250 (£50). As tax is not collected at source on interest, he will have to pay this £50 to HMRC another way – most likely by having his PAYE tax code adjusted. 

John and James: adjusted net income

John (not a Scottish taxpayer) has total income of £50,271 in 2023/24. Of this, £1,000 is savings interest. Since his total income means that he is a higher rate taxpayer, he is entitled to a personal savings allowance of £500.

His savings income is taxed as follows:

£500 @ 0% = £0

£499 @ 20% = £99.80

£1 @ 40% = £0.40

Total tax on savings interest of £100.20

James (not a Scottish taxpayer) has total income of £50,270 in 2023/24. Of this, £1,000 is savings interest. Since his total income means that he is a basic rate taxpayer, he is entitled to a savings allowance of £1,000.

His savings income is taxed as follows:

£1,000 @ 0% = £0

Total tax on savings interest of £0

Thus, a £1 increase in income produces an additional tax liability of £100.20. 

Mo: the starting rate for savings band and personal savings allowance

Scenario A

In 2023/24, Mo has pension income of £14,000 and savings income of £1,500. He has to pay tax at 20% on £1,430 of his pension income (the amount left once his £12,570 personal allowance is used). He does not have to pay any tax on his savings income, because it all falls within the starting rate for savings band – his total income is less than £17,570. Mo does not need to use his personal savings allowance.

Scenario B

If Mo had savings income of £3,650 instead of £1,500, he would not have to pay any tax on his savings income, because £3,570 would fall within the starting rate for savings band and the remaining £80 would fall within his personal savings allowance.

Scenario C

However, if Mo had savings income of £4,650 instead of £1,500, he would have to pay tax at 20% on £80 (the first £3,570 falls within the starting rate for savings band; the next £1,000 falls within the personal savings allowance; the remaining £80 is taxable at 20%). As tax is not collected at source on interest, he will have to pay this £16 tax to HMRC another way.

Scenario D

Finally, if Mo’s pension was £18,000 rather than £14,000 then the starting rate for savings band would not be available to him at all. He would therefore have to pay tax at 20% on £500 of his savings income in scenario A, £2,650 in scenario B and £3,650 in scenario C (that is, the amount left over once his £1,000 personal savings allowance has been used). 

Magda: how income within the personal savings allowance counts towards higher rate threshold

Magda (who is not a Scottish taxpayer) has earnings of £48,650 and savings income of £1,750 in 2023/24. She has to pay tax at 20% on £36,080 of her earnings (the amount left once her £12,570 personal allowance is used). After her earnings are taken into consideration, she has £1,620 left in her basic rate band.

To work out how much her personal savings allowance is and how much tax she has to pay on her savings income, she needs to first work out her ‘adjusted net income’. Her adjusted net income is her total income less any reliefs. She has not made any pension contributions or any Gift Aid donations, so her adjusted net income is £50,400 (earnings of £48,650 plus her savings income of £1,750). As her adjusted net income is more than £50,270, her personal savings allowance is £500.

Although £500 of her savings income is tax free due to the personal savings allowance, it uses up some of her basic rate band, meaning only £1,120 of her remaining savings income (of £1,250) can be taxed at 20% – tax of £224. This means that she has to pay 40% on £130 – tax of £52. As tax is not collected at source on interest, she has to pay this total of £276 tax (£224 + £52) to HMRC another way. 

Liz: dividend allowance

Liz has a pension of £20,000 and receives dividends of £500 in 2023/24.

She has to pay tax at 20% on £7,430 of her pension (the amount left once her £12,570 personal allowance is used). However, her dividend income is tax free (charged to tax at 0%) as it is less than the dividend allowance.

If Liz received dividends of £11,000 instead, the £1,000 dividend allowance would apply to some of her dividends leaving the remaining £10,000 to be taxed at 8.75%. Liz would have tax of £875 to pay on the dividends and would need to contact HMRC to arrange payment. As her dividends in this case are over £10,000, it is likely that HMRC will ask her to complete a tax return. 

Serenna: dividend allowance and effect on rate bands

Serenna has earnings of £40,650 and receives dividends of £10,000 in 2023/24. She has to pay tax at 20% on £28,080 of her earnings (the amount left once her £12,570 personal allowance is used). She does not have to pay tax on £1,000 of her dividend income because of her dividend allowance.

However, the dividends that fall within the dividend allowance still use up her basic rate band, so she has to pay tax at 8.75% on £8,620 of her remaining dividend income (£754.25) and at 33.75% on £380 (£128.25). Serenna has to pay £882.50 of tax on her dividend income and needs to contact HMRC to pay it. 

Eric: example combining starting rate for savings, personal savings allowance and dividend allowance

Eric 1

Eric (not a Scottish taxpayer) has earned income of £15,000, savings income of £4,000 and dividend income of £1,000 in 2023/24.

He has to pay tax at 20% on £2,430 of his earnings (the amount left once his £12,570 personal allowance is used). He has £2,570 of the starting rate for savings band available as his earned income is less than £17,570. So, the first £2,570 of his savings income is taxable at 0%. As his adjusted net income is £20,000, his personal savings allowance is £1,000. This means that he has a tax rate of 0% on a further £1,000 of his savings income. He must pay tax at 20% on the remaining £430 of his savings income, which is £86. He does not have to pay any tax on his dividend income as it does not exceed his dividend allowance of £1,000. As tax is not deducted at source from savings interest, Eric will have to pay the £86 tax to HMRC another way.

The above example can be represented as follows:

	Earned income (£)	Savings income (£)	Dividend income (£)
	15,000	4,000	1,000
Less: Personal Allowance	(12,570)	0	0
	2,430	4,000	1,000
Tax thereon:	2,430	@ 20%	486
Starting rate for savings	2,570	@ 0%	0
	5,000
Personal savings allowance	1,000	@ 0%	0
	430	@ 20%	86
Dividend allowance	1,000	@ 0%	0
Total			£572

Eric 2

If Eric instead has earned income of £15,000, savings income of £4,000 and dividend income of £32,000, he has to pay tax at 20% on £2,430 of his earnings (the amount left once his £12,570 personal allowance is used). He has £2,570 of the starting rate for savings band available as his earned income is less than £17,570.

So, the first £2,570 of his savings income is taxable at 0%. As his adjusted net income is £51,000, his personal savings allowance is £500. This means that he has a tax rate of 0% on a further £500 of his savings income. He must pay tax at 20% on the remaining £930 of his savings income, since it falls into the basic rate band – £186 tax. He does not have to pay tax on £1,000 of his dividend income as it falls within his dividend allowance. He must pay tax at 8.75% on £30,270 (this is the amount of dividend income above the dividend allowance but which falls within the basic rate band) (£2,648.62 tax) and at 33.75% on £730 (the remaining dividend income, which falls within the higher rate band) (£246.37 tax) of his dividend income.

As tax is not deducted at source from savings interest, Eric will have to pay the £186 tax on his savings interest and the £2,894.99 tax on his dividend income to HMRC another way.

Again, the above can be represented as follows:

	Earned income (£)	Savings income (£)	Dividend income (£)
	15,000	4,000	32,000
Less: Personal Allowance	(12,570)
	2,430	4,000	32,000
Tax thereon:	2,430	@ 20%	486
Starting rate for savings	2,570	@ 0%	0
	5,000
Personal savings allowance	500	@ 0%	0
Remainder of savings income	930	@ 20%	186
Dividend allowance	1,000	@ 0%	0
Dividend income chargeable at basic rate	30,270	@ 8.75%	2,648.62
Basic rate band	37,700
Dividend income chargeable at higher rate	730	@ 33.75%	246.37
Total			£3,566.99

Finlay: allocation of personal allowance

In 2023/24, Finlay (who is not a Scottish taxpayer) has employment income of £48,650, savings income of £800 and dividend income of £6,000. If he deducts his personal allowance in full against the employment income, the position is as follows:

	Earned income (£)	Savings income (£)	Dividend income (£)
	48,650	800	6,000
Less: Personal Allowance	(12,570)
	36,080	800	6,000
Tax thereon:	36,080	@ 20%	7,216
Personal savings allowance	500	@ 0%	0
Remainder of savings income	300	@ 20%	60
Dividend allowance	1,000	@ 0%	0
Remainder of dividend income	5,000	@ 33.75%	1,687.50
Total			£8,963.50

However, the law allows you to deduct the personal allowance in the most beneficial way. If Finlay deducted only as much of his personal allowance against his employment income such that £37,700 of his employment income is charged to tax at 20%, the personal savings allowance and dividend allowance save tax at higher rates:

	Earned income (£)	Savings income (£)	Dividend income (£)
	48,650	800	6,000
Less: Personal Allowance	(10,950)		(1,620)
	37,700	800	4,380
Tax thereon:	37,700	@ 20%	7,540
Personal savings allowance	500	@ 0%	0
Remainder of savings income	300	@ 40%	120
Dividend allowance	1,000	@ 0%	0
Remainder of dividend income	3,380	@ 33.75%	1,140.75
Total			£8,800.75

By doing this, Finlay is able to save tax of £162.75 (£8,963.50 less £8,800.75).

Where can I find more information?

You can find out more detailed information about savings and tax in the HMRC savings manual.