We are often asked about paying tax on savings interest generated through bank accounts. This is mainly because savers have benefitted recently from the higher interest rates that have been available on cash deposits.
Unfortunately, the freezing of tax allowances and personal allowances means that the previous exemption of interest received from income tax charges may well now create a tax charge as savings interest nudges ahead of tax reliefs.
A reminder of the current allowances that impact tax on savings interest are set out below.
Tax on savings – what allowances are there that keep savings interest free of tax?
There are three allowances:
1. Your personal allowance, currently £12,570, unless this has already been used against other income.
2. The starting rate for savings. This can be as much as £5,000 but this amount is reduced if your other income exceeds your personal allowance. When your other income exceeds £17,570 you will no longer be eligible for this relief.
3. The third allowance is the Personal Savings Allowance (PSA). This is £1,000 if your income is taxed in the basic rate band, £500 if taxed in the higher rate band, and if you pay income at the 45% additional rate, you are not entitled to claim the PSA.
What interest is covered by your relevant allowances?
Your allowances can be claimed against interest from:
• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts
Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance.
Tax on savings – what happens if your allowances do not cover interest received?
You will pay income tax on any interest received in excess of any available allowances at your usual rate of income tax.
Do you need to register for self-assessment if your savings interest exceeds your allowance?
You should only need to register for self-assessment – based on your savings income – if your income from savings and investments exceeds £10,000.
If your income from savings and investments is less than £10,000 and you have no other requirement to register for self-assessment, you are still obliged to inform HMRC if you have income that has not been taxed at the rate of Income Tax given your other income sources. This should be done by calling HMRC on 0300 200 3300 quoting your National Insurance number. Any taxes due will then usually be collected through your PAYE tax coding.
Are you paying tax on savings interest? We can help…
If you receive communications from HMRC demanding income tax on savings income and you are unsure if their calculations are correct, please speak to your personal tax adviser, contact or call us on 020 7870 9050. Your tax adviser will work with you to check HMRC’s calculation and if necessary appeal any incorrect assessments.
