The majority of UK citizens resident here in the UK are able to earn some interest on their savings without having to pay any tax, thanks to specific allowances which include:
- Your personal allowance
- The starting rate for savings
- The personal savings allowance (PSG)
All three of these allowances are allocated and refreshed each tax year, and how much you receive is dependent on your other income. To avoid any doubt, the tax year starts on the 6th of April and ends on the 5th of April of the following year.
Are you aware of what tax on your savings you might have to pay? Do you know what your personal savings allowance (PSA) is? For the answers to “Do I have to pay tax on my savings in the UK?” and other questions relating to savings and investments, please read on.
| Do I have to pay tax on my savings in the UK? | It depends on several factors, such as income, account type, savings income amount, and personal savings allowance eligibility |
| What is the personal savings allowance amount for the tax year 2023/24? | Up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. |
| What is the personal income tax allowance for the tax year 2023/24? | £12,570 |
| Do I report my savings income to HMRC in the UK? | Yes, you must do a Self Assessment tax return if you have taxable savings income in the UK |
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Your personal savings allowance (PSG)
An excellent place to start when asking, “Do I have to pay tax on my savings in the UK?” when looking into savings and taxation is to focus on the UK’s Personal Savings Allowance, or PSA for short.
Following the introduction of the personal savings allowance in the UK back in April 2016, the vast majority of people are able to earn up to £1,000 worth of interest on their savings without having to pay taxes. It means that less than 5% of savers are liable.
The UK PSA covers any interest you might earn from savings in various accounts, including bank or building society accounts, credit union accounts, corporate bonds, government bonds and gilts, and savings accounts. In addition, if you have any foreign currencies in a UK-based savings account, these too are covered. Income from ISAs, however, is not included in your PSA.
Tax-free savings and the starting rate for savings
“I’m wondering, do I have to pay tax on my savings in the UK if I earn interest on them?” Well, you will pay 0% UK income tax on savings interest if your combined income and savings interest earned total are £18,750 or less in one tax year. The figure of £18,750 is made up of three separate components.
The first component is the basic income tax allowance, which is £12,750.
The second component, set up for low earners, is what is known as the starting rate for savings, and this is £5,000.
The third element is the personal saving allowance (PSG) you are entitled to, which is £1,000 per annum for basic taxpayers.
The UK savings allowance can go above £18,750 if you receive specific allowances such as blind person’s or marriage allowance. In addition, your employer or pension provider is made aware of how much tax-free income you are entitled to by the tax code HMRC gives you.
You can find more information about increased UK tax on savings interest allowances on the Gov.UK website.
How to calculate your potential tax savings
If you’re wondering, “Do I have to pay tax on my savings in the UK,” a good place to start is by turning your curiosity to your potential tax savings and, in particular, the starting rate for savings.
For basic rate taxpayers and low earners, that starting rate is £5,000, and for every pound of income over your personal tax allowance of £12,750, you take one pound from the £5,000 starting rate.
If you earn £16,000 per annum and your personal tax allowance is £12,750, the difference is £3,250. Subtract this from your £5,000 starting rate, and the balance of your starting rate is £1,750. But you also have your personal saving allowance of £1,000, taking your revised balance for your starting rate for savings tax to £2,750.
In other words, using this example. If you’re asking, do I have to pay tax on my savings in the UK, the answer is no, not if it’s below the £2,750 starting rate.
But the PSA isn’t the same for everyone. The starting rate for tax-free savings is, in effect, means-tested. Meanwhile, for low earners, the starting rate is £5,000. It is different if you are a higher or additional rate taxpayer.
Higher-rate taxpayers with a tax code that means they pay 40% income tax on their earnings can only earn up to £500 in savings interest per year and pay no tax. For additional rate taxpayers, there is no allowance whatsoever.
If you find tax-free savings calculations with their earnings tax thresholds, tax codes, PSAs, percentages, and starting rates a little daunting, there is a tax on savings interest calculator for UK savers on the telegraph that you can use.
Has the Personal Savings Allowance (PSA) made ISAs less attractive?
Before the personal savings allowance (PSA) was introduced in 2016, paying tax on savings was pretty much unavoidable. But that all changed when the different types of ISAs were created and first introduced in 1996, offering a clear preferential choice. But after the PSA came into existence, it did lessen the attraction of ISAs somewhat for many people, particularly those with smaller saving pots, while interest rates remain so low.
However, when interest rates start to climb, as they are now doing, savers will reach their PSAs that much quicker. It means that for savers investing in the long term and looking to shelter as much of their savings as possible from the taxman, individual savings accounts (barring cash ISAs) are still an attractive vehicle.
However, as with all investing, your capital is potentially at risk.
Cash ISAs versus stocks and shares ISAs
Your investor profile defines your preferences when it comes to financial decisions, whether you are risk-tolerant or risk-averse or whether you prefer short or long-term trading.
For risk-averse individuals, the Cash ISA is often the chosen vehicle. But the penalty for the safety of your savings or investments in Cash ISAs is the low interest rate that is usually applied.
Stocks and Shares ISAs, on the other hand, earn interest at significantly higher rates than Cash ISAs. However, you must be aware of the risk that the value of your investment in an investment ISA can fall and rise. But the main attraction is that Stocks and Shares ISA taxes are virtually non-existent – so in terms of tax on savings interest in UK investment ISAs, you can rest assured that there will be no income or capital gains tax to pay.
The big attraction of Stocks and Shares ISAs is that they are tax-free savings accounts UK investors can take advantage of. So, if you are asking yourself, “Do I have to pay tax on my savings in the UK”, you don’t, even when your investment portfolio is worth hundreds of thousands of pounds and you receive dividend income. Yes, that’s right. Another feature of saving in stocks and shares is that there is also a dividend allowance. You don’t have to pay tax on any dividend income because you can receive dividend income of up to £1,000 per annum tax-free.
Stocks and shares ISAs also win in terms of taxation when compared to most forms of investing. Take OEICs (open-ended investment companies) and government and corporate bonds, for example. None of these are tax-free savings accounts in the UK. In these situations, you will pay tax on interest income in the UK as well as capital gains tax.
Significant changes made in 2023 to pension savings
In the Spring Budget, Chancellor Jeremy Hunt announced a change to the maximum tax-free annual amount you can put into your pension after you’ve started withdrawing money from your fund. The cap rose from £4,000 to £10,000 with effect from the 6th of April 2023. It applies whether you’ve begun to draw an income using a drawdown plan or taken a taxable lump sum amount from your fund.
It impacts the answer to the question of ‘do I have to pay tax on my savings in the UK?’ because the more you save, the more tax you may have to pay, and of course, it could push you into a higher tax bracket.
Another significant change that has been implemented is the increase in the pensions annual allowance. If you have an uncrystallised pension fund, the maximum you can save into it in any tax year has been increased from £20,000 to £60,000.
The annual tapered allowance has also been increased. It was £240,000 but has now been lifted to £260,000. If you’re a very high earner, it means that for every £2 earned over the threshold, your annual allowance tapers down by £1 until it floors at £10,000. It applies if your annual income is £320,000 or more.
Lastly, Mr Hunt has announced that the LTA will be removed altogether from the 6th of April 2024, which means there won’t be a cap on the amount you can build up in terms of pension benefits while you’re able to get tax relief.
Pensions and taxation
It’s important to understand how your pension is taxed as you wonder, ‘Do I have to pay tax on my savings in the UK?’. By knowing how UK Pension and taxation work together, you can make informed decisions about your retirement planning and potential tax savings.
Do I have to pay tax on my savings in the UK if they are in a pension? Or is pension income taxable? Regrettably, it is. Paying tax on savings when you’ve retired because all your savings are in a pension is a drag, but whatever type of pension you have, a workplace defined benefit or defined contribution scheme, or any other private pension or SIPP, HMRC demands their share of the spoils.
If you wish to carry on working after reaching the state pension age, you can do so, but you need to be aware of paying tax on savings when retired in the UK when those savings are in pensions. You can take your pension, but if you do, both your pension income and your employment income, if you continue to work after you’ve reached state pension age, are taxable. But while any income above your tax and savings allowance is susceptible to income tax, you don’t have to pay National Insurance.
Although pension contributions are taxable, you can claim tax relief. In terms of reducing income tax on UK pension contributions. Basic rate taxpayers can claim 20% relief, higher rate taxpayers can claim 40%, and additional rate taxpayers can claim 45%.
With workplace pensions, your employer automatically claims the first 20%, so you don’t need to claim it yourself. But you do need to claim relief on contributions above 20%, so it is imperative to fully understand pension tax relief for high earners.
You make pension contribution tax relief claims by completing a self-assessment tax return. If you have to complete a self-assessment form, you need to be aware of the UK tax year dates 2023.
Employers can use one of two methods for dealing with pension contribution tax relief – relief at source or paid gross. Either way, they will automatically claim the first 20% on your behalf.
In Scotland, when asking, “Do you pay tax on savings”, you’ll be pleased to know that the same relief structure applies and that if you are a 19% basic rate taxpayer, your employer will still claim a 20% pension contribution tax relief.
ISAs and inheritance tax
Although it is outside of the question of “When do you pay tax on savings in ISAs” it is relevant to others if they inherit money from your ISA after your death. If the bequeathed is someone other than your spouse or partner, there is no escape; they will have to pay any tax due.
Pension scams
The risk of being scammed by unscrupulous individuals or companies who are out to steal your pension savings is high. To ensure you are dealing with a bona fide person or business, ensure they are authorised and regulated by the FCA (Financial Conduct Authority). It’s also a good idea to ensure that whatever savings account you use has FSCS (Financial Services Compensation Scheme) protection.
Conclusion
Having read through this article, we hope that you are now fully aware of the relevant issues implied by the question, “Do I have to pay tax on my savings in the UK,” and that you appreciate exactly how your savings income could be taxed.
If you would like to use a tax on savings interest calculator for UK savers, you’ll find one on the telegraph.co.uk.
But please be very wary when speaking to anybody about your pension, regardless of the nature of the discussion. If the Financial Conduct Authority does not regulate whomever you are communicating with, do not follow their advice; better still, don’t speak to them in the first place.
FAQ
Do I have to pay tax on savings in an ISA?
No, you don’t pay tax on the income you earn from savings held in an ISA (Individual Savings Account), as income and gains generated are considered part of tax-free savings in the UK.
What is the tax on savings in the UK?
Tax on savings in the UK is the tax you pay on the income you earn from your savings and investments, such as interest, dividends, and capital gains. But you pay no interest tax in the UK if your savings or investments are in an ISA.
Do I have to pay tax on savings in a pension in the UK?
No, you don’t pay tax on the income you earn from savings in a pension. However, once you start taking an income from your pension, you will pay tax on the withdrawals (pension income).
What is the tax rate on dividends in the UK?
The tax rate on dividends in the UK depends on your income tax band. For the tax year 2023/24, basic rate taxpayers will pay 8.75% on dividends, higher rate taxpayers will pay 33.75%, and additional rate taxpayers will pay 39.35%%.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
