We have written previously about the significant increase in interest rates that we have experienced over the past few years.
As a result, even a relatively modest sum of cash in a market-leading savings account can generate a level of interest that would now suffer a tax liability. Given that most banks pay interest without tax taken off, we explore how should you go about declaring this, to keep the tax man happy.
How is the tax worked out?
Depending on your total income, you may be entitled to a Savings Allowance. For basic rate taxpayers this means you can earn interest of up to £1,000 pa tax-free. For higher rate taxpayers, the Savings Allowance is £500 pa. For higher earners with total income in excess of £125,140, no Savings Allowance applies and all interest received is taxable.
At the moment, the market-leading instant access savings accounts are paying about 4.85% pa. The table below shows the amount you could have in savings before the interest received exceeds the Savings Allowance, causing a tax liability.
Taxpayer Type | Maximum Savings at 4.85% before Savings Allowance is exceeded |
Basic Rate | £20,618 |
Higher Rate | £10,309 |
Additional Rate | Nil |
Any savings interest received in excess of the amounts above is taxable.
For non-taxpayers and those earning less than £17,570, it’s slightly different because in addition to the Savings Allowance, up to a further £5,000 interest can be received which is taxed at 0%.
As you can see, even a relatively modest sum in savings can cause a tax liability.
The tax rates that apply to savings interest are as follows:
Taxpayer Type | Tax rate on savings interest |
Basic Rate | 20% |
Higher Rate | 40% |
Additional Rate | 45% |
How will I know how much interest I received?
Banks will usually issue you with a statement after the end of each tax year, stating how much interest was paid and any tax that was deducted during the previous tax year. For online accounts, you can usually login to obtain this information.
How is the tax paid?
Savings interest is normally paid gross, without any tax deducted. Therefore, if your savings interest exceeds any Savings Allowance you’re entitled to, you’ll have some tax to pay.
If you normally complete a self-assessment tax return, you should report any savings interest received within your tax return.
If you’re employed or receiving pension income, HMRC will adjust your tax code to collect the tax that’s owed. This is usually done automatically because the bank will notify HMRC of the interest they have paid.
If your income from savings and investments exceeds £10,000 pa, you’ll need to complete a tax return. This includes interest on savings, and dividends from investments (even if the dividends are reinvested).
HMRC have a helpful tool to determine whether you need to complete a tax return. You can access it here:
What about ISAs?
One of the benefits of ISAs is that any interest received on cash within an ISA is tax-free, and you don’t need to report it to HMRC. If you are not already using your ISA allowance elsewhere in your portfolio, it would be well worth considering sheltering your cash deposits within a Cash ISA.
Spend Time are here to help
As part of our regular Forward Planning we will help you review your cash balances and ensure you are achieving a reasonable rate of interest. We can help you determine whether you will have any tax to pay on your savings, and whether you need to take action to report it.
Between times, if you'd like us to help you find a suitable home for cash that becomes available, perhaps from a maturing fixed rate bond or an account with an initial bonus period that has ended, do get in touch and we'll be glad to advise you on the best rates on offer at the time.
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Please refer to our Legal Declarations page.