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.

Avatar

By

Alison Banney

Updated

Fact checked

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 £125,14040%
Additional rateover £125,14045%

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%

How much money can you have in your savings account without being taxed?

The table below illustrates how much you can earn before paying tax on your savings interest.

Tax rateAnnual income (not from savings)Tax-free interest on savings
No tax to £12,570Earn up to £5,000 tax-free through the starting rate for savings
Basic rate taxpayer, low income to £17,570Earn up to £5,000 tax-free through the starting rate for savings, as well as up to £1,000 tax-free with the PSA
Basic rate taxpayer£17,571 to £50,270Earn up to £1,000 in savings interest tax-free through the PSA
Higher rate taxpayer to £125,140Earn up to £500 in savings interest tax-free through the PSA
Additional rate taxpayerOver £125,140No savings interest allowance

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.

Are there any tax-free savings accounts?

Yes – an individual savings account (ISA) is tax-free. That means any savings interest (or income) you earn from an ISA won’t count towards your personal savings allowance and you won’t have to pay tax on any of it.

However, you can only pay into one ISA each tax year and you cannot exceed your annual ISA allowance. In the current 2023/2024 tax year, this stands at £20,000. This allowance can be split across 4 different types of ISA, including:

  • A cash ISA
  • A stocks and shares ISA
  • An innovative finance ISA
  • A lifetime ISA (note that you can only pay in up to £4,000 per year into a lifetime ISA).

Alternatively, you can pay your full £20,000 allowance into just one type of ISA.

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.

How do you pay tax on savings interest?

This will depend on your situation. If you are employed or you receive a pension, you don’t need to do anything. HMRC will automatically adjust your tax code to claim back the tax. However, if you’re self-employed, you will need to report how much interest you’ve earned through your self-assessment tax return.

If you believe you’ve paid too much tax on your savings, you can claim a refund through your self-assessment tax return if you complete one, or by filling in a form R40. You must reclaim your tax within 4 years of the end of the relevant tax year.

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.

Bottom line

Knowing when you might be taxed on savings interest is essential no matter what the circumstances. But it’s even more important as the base rate continues to rise and savings accounts become more competitive. Rising rates mean it could become much easier to go over your personal savings allowance threshold, particularly if you’re a higher rate taxpayer, in which case moving some of your savings into a tax-free ISA could be worth considering.

We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you.

More guides on Finder

Go to site