If you are keeping some money aside for your retirement, emergency or to buy a house, you are liable to pay tax on your savings. Thanks to personal savings allowance (PSA) that allows you to earn a tax advantage on your savings. In this blog, you will learn how much you will be taxed on your savings, what is personal savings allowance, personal allowance and starting rate for savings and how to pay tax on savings interest?
Read on to find out all!
How Much You will be Taxed on Savings?
Most people can earn tax-free interest on their savings. The tax you will pay on savings interest will be based on:
- Your Personal Saving Allowance (PSA)
- Personal Allowance
- Starting rate for Savings
Each year (from 6 April- 5 April), you can benefit from these allowances. The amount of interest your earn will depend on your other income.
Personal Saving Allowance (PSA)
The personal savings allowance (PSA) lets you earn interest without charging any tax on it. The amount of PSA will be based on your Income Tax Band. To calculate your tax band, add all the interest you have earned to your other income.
|Income Tax band||Personal Savings Allowance|
Typically, this allowance applies to the amount of interest you earn from:
- trust funds
- life annuity payments
- payment protection insurance (PPI)
- peer-to-peer lending
- savings and credit union accounts
- bank and building society accounts
- government or company bonds
- some life insurance contracts
- unit trusts, investment trusts and open-ended investment companies
Bear in mind that you can’t claim this allowance on savings you have in your ISAs and some National Savings and Investment accounts.
Along with PSA, you can also use your personal allowance to earn interest without paying any tax on it. In 2021-22, the standard Personal Allowance is £12,570. Note that if you have used this allowance for your pension, wages and other income, you can’t use it to earn interest without paying tax.
Starting Rate for Savings
The starting rate of savings is £5,000 on the interest you earn from your savings account. This rate will decrease if you earn more from the other income (wages, pension). Bear in mind that you can’t claim it if your other income exceeds £17,570.
Every £1 earned from other non-saving income (wages or pensions) over your Personal Allowance will reduce your starting rate for savings by £1.
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How to Pay Tax on Savings Interest?
You need to pay tax on savings interest similar to your income tax. If you’re employed or receive a pension, HMRC will levy taxes on your interest by changing your tax code.
HMRC works out your tax code by considering your current year’s interest with that of the last year. You are required to report the interest you earn on your savings, upon completing the Self Assessment Tax Return.
If the amount you earned from savings and investments exceeds £10,000, you need to register for Self Assessment. You can check whether you need to send a self-assessment tax return here.
On the other hand, if you do not receive pensions and are not employed, you don’t need to complete a Self Assessment. Rather, your building society/bank will let HMRC know about the interest you received on your savings at a year-end. Afterwards, HMRC will inform you if you need to pay tax and how to pay it.
Quick Sum Up
Hopefully, you have now understood how much you will be taxed on savings, what is PSA, personal allowance and starting rate of saving and how to pay tax on savings interest. Bear in mind that you will pay tax on savings interest the same way as you pay your income.
Employed persons and pensioners need to report their interest via a self-assessment tax return that will allow HMRC to charge tax by changing their tax code. On the flip side, non-employed and people without any pension are not required to complete self-assessment tax returns as their bank and building society will let HMRC know the tax they owe.
Disclaimer: This blog is just for general information on the topic.