Savings Interest and Tax

Savers have recently benefitted from the higher interest rates 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 create a tax charge as savings interest nudges ahead of tax reliefs. A reminder of the current allowances that impact tax on savings interest is shown below.

Allowances 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.

Interest 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.

If your allowances do not cover the 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?

You should only need to register for self-assessment – based on your savings income – if your income from savings and investments exceeds £10,000.

Please see the following link: https://www.gov.uk/apply-tax-free-interest-on-savings

Please see another Accounting Gem blog: https://www.aag-accountants.co.uk/reporting-2023-24-taxable-benefits-reminder-to-deal-with-any-reporting-to-hmrc-before-the-july-deadline/

Call us today 01473744700 so we can discuss your options, there is no charge for an initial discussion or if you need any further help with your accounting issues.

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