Do You Need to Pay Tax on Savings Interest in the UK?
- TBA
- Mar 19
- 5 min read
This month, the Bank of England has lowered the base rate from 4.75% to 4.5%, marking the third interest rate cut since August 2024 and reaching its lowest level in 18 months. Changes in interest rates also impact millions of people’s mortgages, credit cards, and savings rates.
For savers, a rate cut may mean banks will reduce the Annual Percentage Yield (APY) on savings accounts, resulting in lower interest earnings.
If the Bank of England continues to cut rates, banks may further decrease fixed-term deposit rates (such as one-year or five-year savings products), affecting long-term savings returns.
Aside from interest rate changes, savers are also concerned about the following questions:
Do savings interest earnings need to be taxed?
Will there be an investigation if they are not declared?
Today, we’ll provide detailed information on taxation of bank interest earnings.
Do Savings Interest Earnings Need to Be Taxed?
In the UK, the principal amount of savings is not subject to tax, but any interest earned on savings is taxable.
This is known as tax on savings interest, and the specific tax obligations depend on your total income within a tax year (from 6 April to 5 April of the following year) and the applicable tax-free allowances.
These include:
Personal Allowance
Starting Rate for Savings
Personal Savings Allowancees the proportion of their income (4.8%) to Council tax compared to the wealthiest fifth (1.5%).
Personal Allowance
Most individuals can earn a certain amount tax-free before paying income tax, known as the Personal Allowance. The standard Personal Allowance for the 2024-25 tax year is £12,570. If your total income (including wages, pensions, and savings interest) does not exceed this amount, you do not need to pay tax.
However, if your income exceeds £100,000, the Personal Allowance is reduced. For every £1 over £100,000, the Personal Allowance is reduced by £1.
Starting Rate for Savings
If your non-savings income (such as wages or pensions) does not exceed £17,570, you can benefit from up to £5,000 in the Starting Rate for Savings. This means that qualifying savings interest earnings within this threshold are taxed at 0%.
It is important to note that as non-savings income increases, the applicable threshold for the Starting Rate for Savings is reduced. For every £1 of other income above the Personal Allowance, the starting rate allowance is reduced by £1.
For example:
If Alex earns a salary of £16,000 and receives £200 in savings interest, their salary, after deducting the Personal Allowance of £12,570, is £3,430. This means the remaining Starting Rate for Savings is £1,570 (£5,000 - £3,430 = £1,570). Since this is higher than the £200 interest earned, Alex does not need to pay tax on their savings interest.
Personal Savings Allowance
In addition to the above, you may be eligible for a Personal Savings Allowance of up to £1,000, depending on your income tax band.
These tax-free allowances apply to savings interest earnings. Any interest exceeding the allowance is taxed at the applicable rate. Additional rate taxpayers (considered high-income earners) are not eligible for the Personal Savings Allowance.
Therefore, if your annual income exceeds £125,140, you will need to pay tax on all savings interest.
The allowances mentioned generally apply to interest earned from the following accounts:
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) compensation
Government or corporate bonds
Life annuity payments
Certain life insurance policies
Savings within tax-free accounts such as Individual Savings Accounts (ISAs) and some National Savings and Investments (NS&I) accounts are not included in these allowances. Different tax rules also apply to foreign savings and children's accounts.
Tax Planning Strategies
You can optimise your tax strategy by making use of tax-free savings tools and maximising available allowances. Here are some recommendations:
Individual Savings Accounts (ISAs): Interest earned within an ISA is completely tax-free. For the 2024/25 tax year, you can deposit up to £20,000 into an ISA.
Tax-free investment products: Such as Premium Bonds, issued by NS&I. While they do not pay interest, they offer monthly prize draws with tax-free winnings. Individuals can hold up to £50,000 in Premium Bonds. Although returns are uncertain, winnings are tax-free.
Spousal asset allocation: If you are married and your spouse has a lower income, consider holding savings accounts in their name to maximise their Personal Allowance and Personal Savings Allowance.
Declaration Requirements and Consequences of Non-Disclosure
If your interest earnings exceed the tax-free allowances, you must pay tax on the excess amount according to the usual income tax rates. Additionally, if your income from savings and investments exceeds £10,000, you must register for Self Assessment with HM Revenue & Customs (HMRC) and file a tax return.
Failure to declare taxable savings interest may result in:
A tax investigation: HMRC may review your tax affairs.
Penalties and interest: Late tax declarations and payments may incur penalties and interest charges on overdue tax.
To avoid potential legal and financial consequences, ensure you accurately report all taxable income, including savings interest.
Tax Treatment Based on Employment Status
If you have no employment income and do not receive a pension: Your bank or building society will report your interest earnings to HMRC at the end of the year. HMRC will then inform you whether you owe tax and how to pay it.
If you are employed or receive a pension: HMRC will adjust your tax code so that tax is deducted automatically. HMRC estimates your interest earnings based on the previous year’s figures and will notify you of any overpayment or underpayment of tax.
If you have not received a tax calculation letter by 31 March 2025, you must contact HMRC as soon as possible to avoid penalties.
Can You Claim a Refund If You Have Overpaid Savings Interest Tax?
If you have overpaid tax on your savings interest, you can claim a refund within four years of the relevant tax year’s end.
If you complete a Self Assessment tax return, you can claim your refund through your tax return. If not, you must complete an R40 form and send it to HMRC. Refunds typically take up to six weeks to process.
If you have further questions regarding taxation of bank savings interest, or if you are unsure whether you need to pay tax and how much, or if you would like to explore financial and tax planning strategies to reduce tax liability, feel free to contact us.
