You must understand the tax savings and investments so that you manage your money well and do not get surprised later by tax bills that you never expected. Many people think that all savings are tax-free, but that’s not always true. You may be taxed on the interest earned on your savings and income from your investments, depending on how much money you have earned and your overall taxable income.
This guide provides you with information about how savings and investment income are taxed in the UK, if you’re required to pay tax, and whether or not it’s required to report that income to HMRC.
What Is Tax on Savings?
By tax on savings, we mean the tax that is charged on the interest you have in your bank, not the amount deposited. Most banks in the UK do not deduct tax from interest, so it is your responsibility to ensure you have paid the correct tax if it is due. Fortunately, because of some allowances, most people end up paying very little or no tax at all.
Savings Tax Allowances at a Glance
You usually will not be required to pay taxes on your interest if it meets one of the following thresholds:
| Allowance Type | Amount | What It Means |
|---|---|---|
| Personal Allowance | £12,570 | If your overall income (from all sources including interest) is under this threshold number then you do not owe tax. |
| Starting Rate for Savings | Up to £5,000 | If your interest does not exceed these limits, you generally do not owe tax, and your total income is less than this amount. |
| Personal Savings Allowance (Basic Rate) | £1,000 | Basic rate taxpayers will pay taxes on interest at a lower rate. |
| Personal Savings Allowance (Higher Rate) | £500 | Tax exempt for interest for higher-rate taxpayers |
| Additional Rate | £0 | No allowance for additional-rate taxpayers |
Your total interest, regardless of when you earned it, will not exceed the additional rate expectancy limit of your total income minus taxes.
When Do You Pay Tax on Savings?
You will pay taxes during the tax year that the interest is received, not the tax year when it has accrued. This is important to know, especially with fixed-term savings products. For example, interest paid on an annual basis will generate a tax liability for you in that same year. Interest from a fixed bond will create a tax liability when that fixed bond matures. Any taxes owed from a delayed access account would be considered at the time you withdraw that money. Depending on the timing of your tax liabilities, they may move you up or down a tax band and will ultimately impact your overall tax liability.
Tax on Investments
In addition to savings, tax on investments applies to income such as dividends and returns from funds.
Dividend Tax Rates
| Tax Band | Dividend Tax Rate |
|---|---|
| Basic Rate | 8.75% |
| Higher Rate | 33.75% |
| Additional Rate | 39.35% |
If you receive £500 of dividends, all other income will be taxable only if it exceeds that amount. Interest on your bonds will typically also be taxed at your individual income tax rates.
How Do I Pay Tax on Savings and Investments?
With respect to wanting to know about paying tax on any savings or investments, your tax obligation will depend on how you manage your income. In general, HMRC will automatically collect taxes for most taxpayers. However, there are three main situations:
1. PAYE Taxpayers: Your tax code will typically be changed so that any taxes owed are automatically deducted from your salary by HMRC, e.g. through PAYE.
2. Self-Assessment Taxpayers: You must declare your savings or investment income on your Self-Assessment Tax Return.
3. Other Taxpayers: HMRC may contact you directly if there are any taxes owed.
As with anything else in life, there are no guarantees that your taxes will be collected. However, we strongly suggest that you verify any outstanding balances or issues with HMRC.
Do I Have to Notify HMRC of Savings Interest?
Most of the time, you do not have to do anything, but there are situations when you need to contact HMRC. These include:
- If your total amount of interest received exceeds your available allowance, and no tax has been deducted
- If you have received untaxed income and are not registered for self-assessment
- If your total savings or investment income is more than £10,000
Failure to report your taxable income may lead to penalties. Therefore, it is very important to keep within the law.
Reducing Tax on Savings and Investments
There are many valid options for reducing your tax burden. However, the best way is to utilise tax-efficient accounts.
- Tax Efficient Options
- ISAs: Tax-free interest and gains
- Spreading Savings among Both Spouses to Utilise Both Allowances
- Choosing Investments With Less Tax Implications
By employing these tactics, you can substantially lessen, or even eliminate, taxes.
Practical Example
Here’s a simple example to illustrate how tax on savings interest works:
| Scenario | Amount |
| Salary | £30,000 |
| Savings Interest | £1,500 |
| Personal Savings Allowance | £1,000 |
| Taxable Interest | £500 |
| Tax (20%) | £100 |
In this case, only the amount above the allowance is taxed.
How Reflex Accounting Supports You
Taxation of savings and investment can get confusing quite quickly, particularly with so many different tax allowances, reporting requirements and the varying types of income that could generate a tax liability. At Reflex Accounting, we provide you with the expert, practical and tailored support you need to ensure your tax affairs are being handled correctly and efficiently.
Accountants at Reflex will help you understand the different types of tax liability that relate to your savings and/or investments, in addition to ensuring that all available allowances are being used correctly so that you do not pay more tax than necessary.
Accurate Reporting and Calculating
Understanding the various reporting and payment requirements related to your savings and investment income will not be straightforward in every instance. At Reflex Accounting, we will ensure your total savings income and all associated Tax deducted, for example, on your interest, is accurately calculated for both Adjustment PAYE purposes and self-assessment tax returns before submission to HMRC.
Communication and Compliance with HMRC
If you are not sure whether you need to inform HMRC about the interest earned on any savings you have, then Reflex Accounting can assist you in dealing with this. They will communicate directly with HMRC and submit all required disclosures on your behalf.
Tax Efficient Planning
Reflex Accounting does not just concentrate on compliance. They also try to lower your future tax liability by giving you advice on how to structure your savings and investments in tax-efficient ways, e.g. using ISAs and planning for your income to help you reduce the amount of tax you have to pay.
Continual Support and Review
The rules regarding taxation and the financial limits can change, as can your financial circumstances. Therefore, Reflex Accounting will offer a continual support service and will routinely review your situation, enabling you to have an ongoing understanding of when you’ll pay taxes on the savings you earn and how this will affect your overall financial situation.
FAQs
Do I have to pay tax on my savings in the UK?
You do not pay tax on the money you save, but you may pay tax on savings interest if it exceeds your allowances. If your interest stays within these limits, no tax is due.
What is the Personal Savings Allowance and how much can I earn tax-free?
The Personal Savings Allowance (PSA) lets you earn interest without paying tax, depending on your income tax band:
Basic-rate taxpayers: up to £1,000 tax-free
Higher-rate taxpayers: up to £500 tax-free
Additional-rate taxpayers: no allowance
This allowance applies specifically to tax on savings interest, helping reduce or eliminate your tax liability.
Do I pay tax on investment income (dividends, capital gains)?
Yes, tax can be applied to investments. There will be £500 in allowance for received dividends, separate from any capital gains received.
How is savings interest taxed if I have multiple savings accounts?
All interest received on savings accounts combined into one total amount to calculate the applicable tax on all the savings interest received. The banks will report your earnings to HMRC, who will assess what, if any, tax will be due, and how they will take payment for that tax.
