Tax Free Savings Allowances Revisit With High Interest Rates
Published / Last Updated on 27/09/2023
For many years bank and building society interest was taxed at source i.e., basic rate income tax was withheld from your interest before you received it. Therefore, non-tax payers would have to register to get a no income taxes withheld certificate, and higher rate taxpayers would have to pay additional ‘marginal’ rate taxes to 40%/50% (with 20% already withheld/paid and old 50% rate). With effect 6 April 2016, all bank, building society, national savings and other similar interest started to be paid gross to savers with the requirement that you settle your own tax affairs via self assessment.
We have revisited this subject as interest rates have been extremely low for many years but over the last 14 months have increased with Bank of England rate increases to the point where many savers are getting over 6% pa in interest on their savings.
| Personal Income Taxes | Allowances |
| No Tax 0% below | up to £12,570 |
| Basic Rate Tax 20% Starts at | £12,570 and above |
| Higher Rate Tax 40% Starts at | £50,270 and above |
| Additional Rate Tax 45% Starts at | £125,140 and above |
| Tax Free Savings Interest Allowances | |
| Starting Rate for Savings Allowance | £5,000 |
| Personal Savings Allowance Basic Rate Taxpayers | £1,000 |
| Personal Savings Allowance Higher Rate Taxpayers | £500 |
| Personal Savings Allowance Additional Rate Taxpayers | £0 |
Savings Income Tax Rates (i.e. Bank/Building Society Interest Received) - Tax Free Interest with the Starting Rate for Savings and Personal Savings Allowance
- Non-Taxpayers and Lower 'Starting' Rate Taxpayers: Starting Rate for Savings allowance at 0.00% tax for a lower/starting rate taxpayer can reclaim excess if deducted at 20.00% provided all income including savings income is below the £5,000.00 'starting rate' savings interest only allowance limit + personal allowance £12,570.00 i.e., a total of £17,570 pa.
- Basic Rate Taxpayers: Personal Savings Allowance of 1st £1,000.00 interest at 0% tax with excess interest at 20.00 % tax for a basic rate taxpayer.
- Higher Rate Taxpayers: Personal Savings Allowance of 1st £500.00 interest at 0% tax with excess interest at 40.00% tax for a higher rate taxpayer.
- Additional Rate Taxpayers: Zero Personal Savings Allowance so 45.00% Additional Rate Tax on all interest received for High Earners with pensions/earned income more than £125,140.00.
| Example 1 | Example 2 | ||||||
| Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 | Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 |
| £12,570 | £3,000 | £12,570 | £6,000 | £15,570 | £3,000 | £15,570 | £6,000 |
| Tax Free Income | Tax Free Income | Tax Free Income | Tax Free Income | ||||
| £12,570 | £12,570 | £12,570 | £12,570 | ||||
| Taxable Income | Taxable Income | ||||||
| £3,000 | £3,000 | ||||||
| For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | ||||||
| Tax Free | Tax Free | Tax Free | Tax Free | ||||
| Starting Rate for Savings | £3,000 | Starting Rate for Savings | £5,000 | Starting Rate for Savings | £2,000 | Starting Rate for Savings | £2,000 |
| Savings Allowance BRT | £0 | Savings Allowance BRT | £1,000 | Savings Allowance BRT | £1,000 | Savings Allowance BRT | £1,000 |
| Taxable Interest | £0 | Taxable Interest | £0 | Taxable Interest | £0 | Taxable Interest 20% on | £3,000 |
| Example 3 | Example 4 | ||||||
| Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 | Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 |
| £17,570 | £3,000 | £17,570 | £6,000 | £50,270 | £3,000 | £50,270 | £6,000 |
| Tax Free Income | Tax Free Income | Tax Free Income | Tax Free Income | ||||
| £12,570 | £12,570 | £12,570 | £12,570 | ||||
| Taxable Income | Taxable Income | Taxable Income | Taxable Income | ||||
| £5,000 | £5,000 | £37,700 | £37,700 | ||||
| For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | For every £1 above £12,570 Starting Rate for Savings is reduced by £1 | ||||
| Tax Free | Tax Free | Tax Free | Tax Free | ||||
| Starting Rate for Savings | £0 | Starting Rate for Savings | £0 | Starting Rate for Savings | £0 | Starting Rate for Savings | £0 |
| Savings Allowance BRT | £1,000 | Savings Allowance BRT | £1,000 | Savings Allowance BRT | £1,000 | Savings Allowance BRT | £1,000 |
| Taxable Interest 20% on | £2,000 | Taxable Interest 20% on | £5,000 | Taxable Interest 20% on | £2,000 | Taxable Interest 20% on | £5,000 |
| Example 5 | Example 6 | ||||||
| Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 | Earned Income & Pension Income | 3% pa interest on £100,000 | Earned Income & Pension Income | 6% pa interest on £100,000 |
| £80,570 | £3,000 | £80,570 | £6,000 | £130,000 | £3,000 | £130,000 | £6,000 |
| Tax Free Income |
Tax Free Income |
Tax Free Income |
Tax Free Income |
||||
| £12,570 | £12,570 | £0 as Personal Allowance Lost | £0 as Personal Allowance Lost | ||||
| Taxable Income | Taxable Income | Taxable Income | Taxable Income | ||||
| £68,000 | £68,000 | £130,000 | £130,000 | ||||
| Higher Rate Tax Payer 40% So Loses Starting Rate and a Reduced Personal Savings Allowance | Higher Rate Tax Payer 40% So Loses Starting Rate and a Reduced Personal Savings Allowance | Additional Rate Tax Payer 45% So Loses Starting Rate and All Personal Savings Allowance | Additional Rate Tax Payer 45% So Loses Starting Rate and All Personal Savings Allowance | ||||
| Tax Free | Tax Free | Tax Free | Tax Free | ||||
| Starting Rate for Savings | £0 | Starting Rate for Savings | £0 | Starting Rate for Savings | £0 | Starting Rate for Savings | £0 |
| Savings Allowance HRT | £500 | Savings Allowance HRT | £500 | Savings Allowance ART | £0 | Savings Allowance ART | £0 |
| Taxable Interest 40% on | £2,500 | Taxable Interest 40% on | £5,500 | Taxable Interest 45% on | £3,000 | Taxable Interest 45% on | £6,000 |
Interest rates are much higher now so do not get caught out. You may need to pay income taxes on higher interest received whereas before you may have been within Starting Rate for Savings allowances and/or Personal Savings Allowances.
