Do I Have to Pay Tax on Interest on Savings?
Taxation of Interest on Savings
Savings play a crucial role for individuals seeking to secure their financial future. In the UK, the government encourages saving through tax-free allowances, but it is essential to understand the rules to maximise the potential savings while staying tax compliant.
Do I have to pay tax on Savings?
Most people can earn some interest from their savings without having to pay tax. How much you can earn tax-free depends on various factors, including your other income and investments.
There are a several savings and investment incomes on which you may have to pay tax such as interest from savings, income from dividends, and income from life insurance investments. You will only start paying tax when your taxable income exceeds your personal allowance.
Tax-Free Allowances
The Personal Savings Allowance (PSA) allows you to earn up to £1,000 of interest tax-free in addition to the starting rate for savers. The specific amount varies depending on your income tax bracket – £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers are not eligible for the PSA.
Starting Rate for Savings
Individuals with low income may qualify for an additional allowance, allowing up to £5,000 of interest tax-free. Note that this is unavailable for those who have exhausted their PSA.
What interest is included?
The Personal Savings Allowance and Starting Rate for savings covers interest acquired from various sources, including – but not limited to – bank and building societies, savings accounts, trust funds, life annuity payments and some life insurance contracts.
Tax Reporting
Should your savings interest exceed your PSA, you will need to report it to HM Revenue and Customs (HMRC) through a Self-Assessment Tax Return. This ensures the appropriate tax is paid on the excess interest.
Understanding the ins and outs of the taxation of interest on savings is not just about staying tax compliant, but it is a strategic move towards securing your financial future.
Not sure whether this applies to you, or need help with your Self-Assessment Tax Return? Contact us today.
