Everybody aims to stash away a safety net in their savings, but HM Revenue and Customs (HMRC) has issued a cautionary note on the potential tax implications of interest accrued on those savings.
The warning pertains to rules concerning the ‘starting rate’ for savings interest, currently fixed at £5,000.
As per existing financial guidelines, individuals can earn up to this threshold in savings interest without being taxed. Yet, varying levels of additional income can affect eligibility for this allowance by consuming portions of the personal tax-free allowance.
HMRC noted: “Most people can earn some interest from their savings without paying tax.”
It explains that allowances for earning interest before you have to pay tax on it include:
- your Personal Allowance
- starting rate for savings
- Personal Savings Allowance
The government body clarified that individuals have several options for earning interest tax-free including utilising one’s Personal Allowance – set at the standard figure of £12,570 for the current fiscal year, running from 6 April to 5 April. This allowance diminishes once an individual earns over £100,000.
Income Tax rates and respective bands are displayed, with taxation applied post-utilisation of the standard Personal Allowance of £12,570. It must be noted, however, that residents of Scotland follow different income tax bands.
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
For those on lower rungs of the income ladder, there’s a silver lining as they may qualify for an additional savings allowance up to £5,000, enhancing their capacity to accumulate interest without tax infringement.
Those on lower incomes get an extra tax-free allowance of up to £5,000 for their savings.
- If your income from pension or work is under the personal allowance (£12,570), you get the full £5,000, meaning you can earn up to five grand in savings interest without being taxed.
- If your income from pension or work is above the personal allowance (£12,570), you lose £1 of the £5,000 starting rate for savings for each £1 you earn above the personal allowance.
- If your income from pension or work is £17,570 or more. You don’t get any of the £5,000 starting rate for savings.
Your personal savings allowance (PSA) could be worth up to £1,000.
The PSA allows anyone who pays a basic 20% tax rate – those earning more than the £12,570 personal tax allowance but less than the £50,270 per year higher tax rate limit – to earn £1,000 per year in savings interest before any tax is due.
| Income Tax band | Personal Savings Allowance |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
This is in addition to the £5,000 starting savings rate. Therefore, if you’re on a low income, you can earn up to £5,000 in savings interest without paying tax, and also pay no tax on the next £1,000 of savings interest – utilising your personal savings allowance.
Your allowance applies to interest from various sources. If your other income is £17,570 or more, you’re not eligible for the starting rate for savings.
Interest 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
- trust funds
- payment protection insurance (PPI)
- government or company bonds
- life annuity payments
- some life insurance contracts
If your other income is £17,570 or more
You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
If your other income is less than £17,570
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.
HMRC gives this example
- You earn £16,000 of wages and get £200 interest on your savings.
- Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.
- The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.
- Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest.
FOr more information on the savings tax limits click on the Gov website here.
