In this Moneyfarm Insights blog, we explore the tax implications on savings in the UK. You can discover everything you need to know about tax on savings in the UK, thereby enabling you to optimise your savings and investments by ensuring your money is working hard for you.
The majority of UK citizens resident here in the UK are able to earn some interest on their savings without having to pay any tax, thanks to specific allowances which include
- Your personal allowance
- The starting rate for savings
- The personal savings allowance (PSG)
All three of these allowances are allocated and refreshed each tax year, and the amount you receive depends on your total income and the savings vehicles you use.
How much you pay in terms of tax on savings in the UK depends on many things. To find out more about what they are, please read on.
Do I have to pay tax on my savings in the UK? | It depends on several factors, such as income, account type, savings income amount, and personal savings allowance eligibility |
What is the personal savings allowance amount for the tax year 2024/25? | Up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. |
What is the personal income tax allowance for the tax year 2024/25? | £12,570 |
Do I report my savings income to HMRC in the UK? | Yes, you must do a Self Assessment tax return if you have taxable savings income in the UK |
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Your personal savings allowance (PSA)
Focusing on the UK personal savings allowance, or PSA for short, is an excellent place to start if you are asking, “Do I have to pay tax on my savings in the UK?”
Following the introduction of the PSA in the UK in April 2016, the majority of people are able to make tax savings in the UK by receiving up to £1,000 worth of interest. This means that less than 5% of savers will be liable to pay tax.
The PSA covers the interest you might earn from savings in various accounts (see below). In addition, if you have any foreign currencies in a UK-based savings account, these too are covered. Income from ISAs, however, is not included, but don’t worry – it doesn’t impact your PSA.
Tax-free savings options in the UK
Thanks to the PSA, tax savings in the UK are available on up to £1,000 worth of interest via most products, including
- CTFs (Child Trust Funds)
- Individual Savings Accounts – (ISAs)
- Pension Schemes
- Children’s Pensions
- Premium Bonds – National Savings and Investments (NS&I)
- Bank and building society accounts
- Bonds
For more information check out the “Tax free investments” blog on the Insights section of our website.
Tax-free savings and the starting rate for savings
“I’m wondering if I have to pay tax on my savings in the UK when they earn interest? Well, you will pay 0% UK income tax on savings interest if your combined income and savings interest earned total is £18,750 or less in any tax year. The figure of £18,750 comprises three separate components.
The first component is the UK basic income tax allowance, which is £12,750.
The second component was set up for low earners and is what is known as the “starting rate for savings,” and this is £5,000 worth of interest per tax year.
The third element is the personal saving allowance (PSA), which, if you are a basic rate taxpayer, is another £1,000 worth of interest per tax year. When combined (£12,570 + £5,000 + £1,000), these three elements give you an income threshold of £18,570.
The UK savings allowance can go above £18,750 if you receive specific allowances such as a blind person’s or marriage allowance. In addition, your employer or pension provider is made aware of how much tax-free income you are entitled to via the tax code HMRC gives you.
You can find more information regarding the “fine print” on UK tax on savings on the Gov.UK website.
Calculating potential tax savings
A good place to start your quest to find out about the “nitty-gritty” concerning tax on savings in the UK is with the “starting rate for savings.”
As explained, the starting rate is £5,000, and for every pound of income over your personal tax allowance of £12,750, you take one pound from this £5,000 starting point.
For example, if you earn £16,000 per annum and your personal tax allowance is £12,750, you’ll be left with £3,250. Subtract this from the £5,000 starting point, and it reduces the starting rate balance to £1,750.
But you also have your PSA, which is worth £1,000 in interest, which can be added, making a new balance of £2,750. This means you’ve still got £2,750 worth of interest you can earn before any tax is due.
But as explained earlier, the PSA isn’t the same for everyone. The starting rate for tax-free savings is, in effect, means-tested.
If you’re a higher-rate taxpayer paying 40% income tax on your earnings, you can only add up to £500 in savings interest per annum and pay no tax. For additional rate taxpayers, there is no allowance whatsoever.
If you find tax-free savings calculations with their earnings tax thresholds, tax codes, PSAs, percentages, and starting rates a little daunting, you can make use of the “tax on savings interest calculator” on the Telegraph website..
Impact of the personal savings allowance (PSA) on ISAs
Before the PSA was introduced in 2016, paying tax on savings in the UK was pretty much unavoidable. But that changed when the different types of ISAs were introduced in 1999. The amount you could pay into one (your ISA allowance), was £7,000 per tax year if it was a stocks and shares ISA, and £3,000 if it was a cash ISA. Both soon proved attractive to savers and investors.
But after the PSA came into existence, it did lessen the attraction of ISAs somewhat for some people, particularly those with smaller saving pots, while interest rates remained low. However, when interest rates start to climb, savers will reach their PSA limits more quickly. So, for savers investing in the long term and looking to shelter as much of their savings as possible from the taxman, ISAs (barring perhaps cash ISAs) are still an attractive option.
Differences between cash and stocks and shares ISAs
Your investor profile defines your preferences regarding financial decisions based on whether you are risk-tolerant, risk-averse, or prefer to invest short- or long-term.
For risk-averse individuals, the cash ISA is often the chosen vehicle because it offers greater security for your savings. However, the downside is the low interest rate that is usually applied.
Stocks and shares ISAs (also referred to as investment ISAs), on the other hand, earn interest at significantly higher rates than cash ISAs. However, you need to be aware of the risk that the value of your investment in an investment ISA can fall as well as rise. But the main attraction is that stocks and shares ISA taxes are virtually non-existent – so in terms of tax on savings in the UK, when those savings are in as ISA, you avoid having to pay capital gains tax, and income tax.
The size of the investment is irrelevant. even if your investment portfolio is worth many thousands of pounds and you receive dividend income, there’s normally no tax to pay. That’s because the ISA tax-free allowance rules state that you can earn up to £1,000 worth of interest from dividend income tax-free. If the interest gets anywhere near that amount, it doesn’t affect your PSA, so you’ll have plenty of other options.
Stocks and shares held in investment ISAs also win in terms of taxation when compared to most other forms of investing. Take OEICs (open-ended investment companies) and gilts, for example. They cannot normally be held in an ISA and are, therefore subject to tax both in terms of capital growth and encashment. But as previously mentioned, You pay no tax on your savings in the UK when they are held in an investment ISA.
Recent changes in pension savings and tax implications
In the Spring Budget, Chancellor Jeremy Hunt announced a change to the maximum tax-free annual amount you can put into your pension after you’ve started withdrawing money from your scheme and it becomes a crystalised fund. The cap rose from £4,000 to £10,000 with effect from April 6, 2023. It applies whether you’ve begun to draw an income using a drawdown plan or taken a taxable lump sum amount from your fund. It’s something you need to get your head around in the way it impacts tax on savings in the UK.
Another significant change implemented is the increase in the pension annual allowance. If you have an uncrystallised pension fund, the maximum you can save into it in any tax year has been increased from £40,000 to £60,000.
The annual tapered allowance has also been increased. It was £240,000 but has now been lifted to £260,000. If you’re a very high earner, it means that for every £2 earned over the threshold, your annual allowance tapers down by £1 until it floors at £10,000. It applies if your annual income is £320,000 or more.
Lastly, Mr Hunt announced that the LTA will be removed altogether from April 6, 2024. It means there won’t be a cap on the amount you can build up in terms of pension benefits while you’re able to get tax relief.
Pensions and taxation
Understanding how pensions and taxation work is a fundamental component of getting to grips with tax on savings in the UK. It will help you to make better-informed decisions about your retirement planning and potential tax savings.
The fact of the matter is that all pension income is taxable. Yes, paying tax on savings when you’ve retired in the UK is a drag. Unfortunately, whatever type of pension you have, a workplace defined benefit or defined contribution scheme, or any other private pension including a SIPP, HMRC demands their share of the spoils.
If you wish to continue working after reaching the State Pension age, you can do so, but you need to be aware you will be taxed on all your income above the thresholds. This includes income from employment, pensions, and any other investment income. It can increase your total income. It could push you into the next income tax band, making paying tax on savings when retired in the UK a burden you have to bear unless deferring your State Pension is an option. At least you won’t have to pay National Insurance.
While still in employment, pension contributions are taxable, but you get tax relief. Basic rate taxpayers can claim 20% relief, higher rate taxpayers can claim 40%, and additional rate taxpayers can claim 45%. But don’t forget that tax relief on contributions to crystallised pensions is limited to £10k per annum.
As regards tax on savings in the UK with regard to workplace pensions, your employer automatically claims the first 20%, so you don’t need to claim it yourself. But you do need to claim relief on contributions above 20%, so it is imperative to fully understand pension tax relief for high earners.
You make pension contribution tax relief claims by completing a self-assessment tax return. If you have to complete one, you need to be aware of the dates of the UK tax year which are always April 6 to April 5 the following year.
Employers can use one of two methods for dealing with pension contribution tax relief – relief at source or paid gross. Either way, they will automatically claim the first 20% on your behalf.
In Scotland, the same relief structure applies. Even if you are a 19% basic rate taxpayer, your employer will still claim a 20% pension contribution tax relief.
Inheritance tax implications for ISAs and savings
Do you pay tax on savings in the UK when the money is inherited? Yes, we’re afraid you do. But not always. It depends on several things, including the size of the estate being inherited and the relationship between the beneficiaries and the deceased. You can find out more about inheritance tax by reading the “What to do with inheritance in the UK?” blog on the Insights section of the Moneyfarm website.
Pension scams
An online search to avoid paying tax on savings in the UK could expose you to the risk of being scammed by unscrupulous individuals or companies who are out to steal your pension savings. To ensure you are dealing with a bona fide person or business, make sure they are authorised and regulated by the FCA (Financial Conduct Authority). It’s also a good idea to confirm that whatever savings account you use has FSCS (Financial Services Compensation Scheme) protection.
Conclusion
Having read through this article, we hope that you are now fully aware of the rules concerning UK tax on savings. If it helps, a tax on savings calculator for the UK can be found on the Telegraph.co.uk. website
But please remember to be very wary when speaking to anybody about your pension, regardless of the nature of the discussion. If the FiCA does not regulate whomever you are communicating with, do not follow their advice. Better still, don’t speak to them in the first place.
FAQ
Do I have to pay tax on savings in an ISA?
No, you don’t pay tax on the income you earn from savings held in an ISA. Any gains generated and all withdrawals are completely protected by the tax-wrapping nature of all ISAs.
What is the tax on savings in the UK?
It’s the tax you pay on the income you earn from your savings and investments, such as interest, dividends, and capital gains. But you pay no tax if your savings or investments are in an ISA.
Do I have to pay tax on savings in a pension in the UK?
You don’t pay tax on pension contributions made within your pension annual allowance (up to £60k). Neither is fund growth subject to capital gains tax. However, once you start taking an income from your pension, you will pay income tax on the withdrawals according to your total income in any tax year and which income tax band it falls into.
What is the tax rate on dividends in the UK?
The tax rate on dividends in the UK depends on your income tax band. For the tax year 2024/25, basic rate taxpayers will pay 8.75% on dividends, higher rate taxpayers will pay 33.75%, and additional rate taxpayers will pay 39.35%%.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.