Paying tax on interest from a savings account

Just like any other source of income, interest earned from most UK savings accounts is subject to tax.

When you file your income tax return at the end of each financial year, you need to declare all your sources of income, including any income earned from investments. If you have money in a savings account that has earned interest in the previous financial year, you’ll also need to declare this amount and pay tax on savings interest – unless it’s in an ISA, where you don’t pay tax on any interest you earn.

At what rate is the interest taxed?

The amount of tax that applies to the interest you earn on your savings account will be determined by your overall taxable income. The total income you earn each year determines the tax rate you must pay, and HM Revenue & Customs’ (HMRC’s) tax rates for the 2020-2021 financial year, which you can see below.

England and Wales

BandTaxable incomeTax rate
Personal AllowanceUp to £12,5000%
Basic rate£12,501 to £50,00020%
Higher rate£50,001 to £150,00040%
Additional rateover £150,00045%

Scotland

BandTaxable incomeScottish tax rate
Personal AllowanceUp to £12,5000%
Basic rate£12,501 to £14,58519%
Higher rate£14,586 to £25,15820%
Additional rate£25,159 to £43,43021%
Higher rate£43,431 to £150,00041%
Top rateover £150,00046%

Why do I need to declare interest?

Under its rules regarding investment income, HMRC requires all UK residents to declare any interest they receive as income. This is because you’ve earned that money, in a similar way to you earning your salary or wages. And you must pay tax on any money earned throughout the financial year.

What interest do I pay tax on?

You need to declare all money you’ve earned in your tax return, including the following:

  • Interest from savings accounts and fixed-rate bonds held with banks and building societies.
  • Interest received from a children’s savings account opened or operated by you.
  • Interest paid or credited to you by HMRC.
  • Interest earned from foreign sources (although tax offsets may be available).
  • Money you’ve earned from selling investments like shares.

How do I report my interest earned?

You should declare the interest you earn on your annual income tax return. Remember, you don’t need to pay tax on the amount you deposit into your account – it is only the interest you earned on that money that is subject to tax. If you need help declaring your interest and claiming eligible tax deductions, get in touch with an accountant.

What about interest earned in a joint account?

HMRC assumes that joint account holders are equal owners of an account and requires them to pay tax on the interest accordingly. So, for example, if you have a joint savings account with your spouse, the interest paid will be split equally between the two account holders – 50% each. When it comes to completing a tax return, each partner or spouse only declares their share of the interest earned on the joint savings account.

What about interest earned on a child’s savings account?

Taxes will apply to a child’s savings account in two instances. First, if they earn more than their personal allowance, such as from a fund in their name. Second, if they earn more than £100 a year in interest from money given by their parents or legal guardians. The thinking behind this is to stop parents using their children as a tax-free extra allowance. This rule doesn’t apply if the money is given by another relative or a friend.

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