Taxation of Interests Received
Most people can earn some interest from their savings without paying tax.
Your allowance for earning interest tax-free is made up of the following:
· Personal Allowance
· starting rate for savings - depending on your other income
· Personal Savings Allowance - depending on your Income Tax band
You are given this allowance each tax year.
Interest received up to the personal allowance level is not taxed.
Starting rate for savings
You may also receive up to £5,000 of interest tax-free. This is the starting rate for savings.
It is effective added to your personal allowance as an extension.
If your other income is £16,500 or more
You’re not eligible for the starting rate for savings if your other income is £16,500 or more.
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
You earn £16,000 of wages and get £300 interest on your savings.
Your Personal Allowance is £11,500. It’s used up by the first £11,500 of your wages.
The remaining £4,500 of your wages (£15,000 minus £11,500) reduces your starting rate for savings by £4,500.
Your remaining starting rate for savings is £500 (£5,000 minus £4,500). You don’t pay tax on your savings interest as it is within the £500. Any interest above £500 will be taxed at 20% for basic rate taxpayer.
Personal Savings Allowance
You may also get up to £1,000 of interest tax-free depending on your tax band. This is the Personal Savings Allowance.
Income Tax band
Tax-free savings income
Savings covered by your allowance
Your allowance applies to 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
· government or company bonds
· life annuity payments
· some life insurance contracts
Taxed deducted at source
You can reclaim tax paid on your savings interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year.
Note that bank and building society no longer deduct tax from your bank interests.
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Tel: 01442 242491
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