Do I have to pay tax on my savings?

Saving money is all about improving your financial security, having peace of mind, planning your future. So, when you put your cash into a savings account, you want to know it’s growing in a tax-efficient way.

So, if you're wondering, "do I have to pay tax on my savings?" Here are some of the most common questions savers have about being taxed on their cash.

What types of savings are taxed?

Any cash you have in a savings account won’t be taxed, but you might have to pay tax on the savings interest you earn.

ISAs (Individual Savings Accounts), regular savings accounts and fixed-rate bonds can all be subject to taxation. The specific tax rules can vary so it's important to be aware that not all savings are taxed equally.

How is savings interest income taxed in the UK?

In April 2016 the Personal Savings Allowance (PSA) was introduced to benefit existing savers and encourage new savers. Prior to this date, any savings income was potentially liable to income tax.

The PSA now means there’s a tax-free amount your savings can earn in interest across all of your bank accounts (except ISAs) each year without paying tax. Your tax-free allowance is based on your total annual income, which includes your employment income but also other income such as your pensions, certain benefits and reliefs or exemptions.

What is my personal savings allowance?

As the PSA is linked to your income, it will depend on what taxpayer bracket you are in:

• Basic-rate (20%) taxpayers qualify for a £1,000 PSA. Meaning your savings can earn up to £1,000 a year in interest without being subject to tax
• Higher-rate (40%) taxpayers qualify for a £500 PSA. Meaning your savings can earn up to £500 a year in interest without being subject to tax
• Additional-rate (45%) taxpayers do not qualify for a PSA. Meaning they do not get an allowance
• Non-taxpayers, those who earn less than £12,570 may also be entitled to tax-free interest on their savings.

Find out more about the Personal Savings Allowance on the HMRC website.

Are there any other tax-free efficient savings options for me?

Your PSA is not the only way to save tax-free. So, if you’re an additional rate tax-payer, or have utilised your PSA and are still wondering “do I have to pay tax on my savings?” there are some great tax-advantaged savings accounts available. ISAs for pensions are designed to encourage saving for retirement and other financial goals.

Find out more about tax-free savings with an ISA

There are several reasons why a cash ISA may remain a preferable choice for your savings over a standard savings account, even with the introduction of the Personal Savings Allowance (PSA):

• Tax-free interest: With a cash ISA, your interest stays tax-free (up to the annual cap, for 2022/23 this is £20,000), regardless of your income level
• Simplicity: You won't need to be concerned about filing tax returns or adjusting your tax code
• Versatility: ISAs can be seamlessly transferred from one type to another, such as transitioning between cash and stocks & shares
• Transfer: ISA allowances are now transferable to your spouse or civil partner upon your passing, ensuring their continued ability to earn tax-free interest
• Yearly tax protection: Your funds in a cash ISA are shielded from taxation year after year, allowing you to progressively increase the amount you safeguard
• Future-proofing: While interest rates are currently low, when they eventually rise, the threshold for surpassing the PSA limit will decrease, offering added security for your savings.

These advantages can make a cash ISA a worthwhile and advantageous option for your saving needs, and remember, interest earned from ISAs don’t count towards your PSA as it is already tax-free.

If you’re looking to open a savings account, you can find Hodge online rates for ISAs here 

If you want to learn more about ISAs, read our blogs, ‘How savings accounts work: ISAs explained’ and ‘Three great benefits for anyone using a cash ISA’. 

This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.