Saving money is beneficial, providing financial security and peace of mind. Whether you’ve been saving for some time, or are yet to embark on your saving journey, you’re probably wondering if you’ll be required to pay tax on savings interest.
Knowing how much tax you might have to pay on your savings is vital – regardless of how much you plan on saving. To learn more about paying tax on your savings in the UK, continue reading.
How Does Tax on Savings Work?
So, do you need to pay tax on your savings? No, you don’t pay tax on your savings, but you must pay tax on the interest earned from your savings. Simply put, this means that the money in your actual savings account will not be taxed, but the interest earned will be.
However, it is possible to reduce or eliminate the amount of tax you pay on your savings interest. How much tax-free interest you earn will depend on your income tax band.
Personal Savings Allowance (PSA)
What is Personal Savings Allowance (PSA)? PSA is the amount of interest you can earn yearly across all of your accounts without having to pay any tax.
It’s important to note that this doesn’t include Individual Savings Accounts (ISAs). The amount of allowance that you’re allowed depends on the rate of income tax you pay.
| Rate | Income | Allowance |
|---|---|---|
| Basic rate (20%) | £12,571 to £50,270 | £1,000 in savings interest each year with no tax |
| Higher rate (40%) | £50,271 to £125,140 | £500 in savings interest each year with no tax |
| Additional rate (45%) | Over £125,140 | No allowance is available on this income |
If your income is anywhere between £0 and £12,570, you will not have to pay tax.
What Does Your Allowance Apply to?
Your PSA applies to interest from various sources, mainly including:
- Bank accounts
- Building society accounts
- Trust Funds
- Life annuity payments
- Government bonds
- Investment trusts
- Peer-to-peer lending
Although interest made on savings within these particular sources will be taxed, accounts such as ISAs do not count towards your PSA.
Understanding ISAs
An ISA is a tax-efficient savings account available to residents in the UK who are over 18. ISAs allow you to save up to £20,000 completely tax-free. There are a few different types of ISAs to consider using:
- Cash ISA
- Lifetime ISA
- Stocks and shares ISA
- Innovative Finance ISA
Generally, cash ISAs are the most popular. A staggering 7.9 million people opened a cash ISA in the UK between 2022 and 2023, which was an increase from 7.1 million people just the year before.
Do Banks Notify HMRC of Savings Interest?
Your bank or building society will notify HMRC about how much interest you’ve earned on your savings at the end of the year if you’re not employed, don’t receive a pension, or have failed to complete your self-assessment tax return.
If your bank has to inform HMRC on your behalf, you’ll then be contacted and told whether or not you will be required to pay any tax, and how to do so.
How to Pay Tax on Savings
As discussed, you don’t pay tax directly on your savings, you pay tax on the amount of interest earned (depending on how much income tax you pay). Paying tax on your savings is similar to paying other types of tax.
HMRC will adjust your tax code and collect the amount of tax due on the interest earned from your savings – this is done automatically. However, if you complete a self-assessment tax return, you must include any interest earned on your savings.
Can You Reclaim Tax Paid on Your Savings?
Yes, you can reclaim tax paid on the interest earned in your savings. If you think you’ve paid too much tax on the interest earned in your savings, you must contact HMRC and inform them as soon as possible. You also have two other options to reclaim tax paid on your savings:
- Use the form R40 (this can be done online or printed and sent back in the post)
- Use your self-assessment tax return
Before attempting to reclaim tax back, you must be aware that:
- You can only reclaim tax back within 4 years of the end of the tax year
- It can take up to 6 weeks after reclaiming tax to receive a refund
Tailored Tax Advice
Having access to expert tax advice is key. We understand that keeping up with your finances and paying taxes correctly can be difficult. Everybody wants to save and have peace of mind, but knowing where to save your money and how much tax you might have to pay can get confusing.
By working with an accountant, you can rest assured that you’ll be equipped with the best, most efficient tax advice. At DH Business Support, we offer exactly that. Our clients benefit from our knowledge and experience handling taxes. We aim to make savings on your taxes while providing you with helpful and friendly advice.
To learn more about how our team of accountants can help you, please don’t hesitate to get in touch. We look forward to hearing from you soon!