Do I need to pay tax on my savings?

Right now, this question has never felt more important.

If you’ve taken out a savings product recently, you may have noticed interest rates are higher. And this is certainly good news when it comes to growing your money. But equally – earning more interest on your savings could see you paying more tax.

Because of today’s higher savings rates, 2.7 million savers are expected to pay tax on their savings over 2023 and 2024 – according to HMRC. That’s four times the number of people from just four years ago.

Don’t panic, though.

Because there are steps available to help you reduce the tax you pay on your savings.

How does tax on your savings work?

  • To be clear, you don’t get taxed on the money you put into your savings account. Tax is taken from the interest you earn on your savings.
  • Through a Personal Savings Allowance, you could earn up to a certain amount of tax-free interest on your savings each year (6 April to 5 April). Find out how by using our Personal Savings Allowance Calculator.
  • If you earn more interest on your savings than your Personal Savings Allowance, you’ll pay tax.
  • The amount of tax you pay depends on the income you earn – and the tax band you’re in.

What a pay rise could mean for your savings

The latest wage boosts have seen more adults than ever falling into the higher rate tax band. With one in five set to become higher rate taxpayers by 2027.

Why is this important?

Your tax band plays a big role in the amount of tax you pay on your savings.

Firstly, the higher your band is, the more you’re taxed. (Basic rate taxpayers pay 20% in tax, higher rate taxpayers will pay 40%, and for additional rate taxpayers it’s 45%.)

And secondly, moving from a basic rate tax band to higher rate tax band means your Personal Savings Allowance will halve to £500. So, through your allowance, you’ll be unable to protect as much of your savings from tax.

How much do you need in savings before paying tax?

These days, with savings rates higher, the amount you need in a savings account is much less, before you need to start paying tax on the interest.

For example, based on an easy access account with a rate of 5%, here’s how much you’d need in savings before interest is taxed.

Tax band Basic rate Higher rate Additional
Balance before interest is taxed £20,001 £10,001 Tax is paid on all savings

How tax could eat into your savings pot

To give you an idea, let’s say you have a total pot of £30,000 in savings in a 1 year fixed rate bond – with a current interest rate of 5.00%.

In 12 months, you’d earn £1,500 in interest. Taking into account the Personal Savings Allowance:

  • If you’re a basic rate taxpayer, you’d be taxed on £500 at 20%. So, in a year you’d pay £100.
  • If you’re a higher rate taxpayer, you’d be taxed on £1,000 at 40%. So, in a year you’d pay £400.
  • If you’re an additional rate taxpayer, you’d be taxed on the full amount of £1,500 at 45%. So, in a year you’d pay £675.

Yep, paying that amount in tax each year could have a huge impact on your savings.

Although the Personal Savings Allowance might not be enough on its own, there are other options…

This is where an ISA could really help you

The great thing with an ISA is that, unlike the Personal Savings Allowance, it doesn’t matter how much you earn.

  • Every UK resident is entitled to an ISA allowance.
  • Each tax year (April 6 to April 5), you can typically put up to £20,000 into an ISA depending on your age.
  • The interest you earn is free from income tax and capital gains tax.

Over 2023/24, ISAs are set to save us an estimated £6.7 billion in tax – according to the Office for National Statistics.

Different types of ISAs

There are six types of ISAs to choose from, including:

  • Easy access ISA– if you want flexibility to access your money regularly. (Ideal for an emergency fund.)
  • Fixed rate ISA – if you don’t need to access your money for one to five years. (Ideal for short-term goals.)
  • Stocks and shares ISA – if you don’t need to access your money for at least five years. And you’re willing to accept some risk to your capital. (Ideal for long-term goals.)

Right now, you can split your allowance of £20,000 between the different types of ISAs. And from April 2024, ISAs will be more accessible and flexible than ever.

More flexibility and control

  • From April 2024, you can have different products under one ISA (in the same tax year).
  • So, if you have a Cash ISA, you’ll be able to spread your £20,000 allowance across a mix of easy access Cash ISA and fixed rate Cash ISA products.
  • Being able to use other providers and products at the same time means you can switch to competitive deals when they’re available.

This is such an exciting time to save your money. But with more savers impacted by tax, we’re to help you get the most out of your savings.

Why not browse our range of ISAs.

Or you can speak to one of our friendly ISA specialists – to help you make informed decisions. And grow your savings in a tax-efficient way over the long term.

To get started, you can either:

  • Call us on 0345 600 6898
  • Request a call back
  • Visit your local branch

You could benefit from a free and quick chat today.

Important information

Stock market-based investments are not like Building Society savings accounts. The value of your investments and any income can go down or up and you may get back less than you invest. The way your savings are taxed depends on your personal circumstances. Tax rules may change in the future.

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