Explained: When do you need to declare the interest earned on savings?

Rising interest rates have been fantastic news for savers. But it might have left you wondering if you need to pay tax on the interest you’ve earned, and how to pay it if you are liable.

According to a March 2024 survey carried out by online bank Marcus, 71% of people were not aware that the interest on savings could be taxed. With HMRC predicting that an extra 1 million taxpayers would be liable for tax on savings interest in 2023, some might face an unexpected bill.

Read on to find out what you need to know about tax on savings.

If the interest your savings earn exceeds tax allowances, it could be liable for Income Tax

There are several allowances that you could use to reduce the amount of tax due on the interest your savings earn.

Personal Allowance

The Personal Allowance is the total income you can receive before Income Tax is due. If your salary, pension or other income doesn’t use up your Personal Allowance, you can use it to earn interest tax-free. In 2024/25, the Personal Allowance is £12,570, so it might be worth reviewing your other income sources when assessing if you could pay tax on interest.

Personal Savings Allowance

In addition, most people benefit from a Personal Savings Allowance (PSA). If the total interest your savings earn falls below this threshold, they are not liable for Income Tax.

Your PSA depends on the rate of Income Tax you pay. For 2024/25, the PSA is:

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers
  • £0 for additional-rate taxpayers.

Rising interest rates mean you don’t have to have as much as you once did to exceed the PSA before the interest could become liable for tax.

Indeed, according to Money Saving Expert, as of May 2024, the top easy access account is paying interest of 5.01%. That means basic-rate taxpayers could save £19,960 before they exceed the PSA. For higher-rate taxpayers, this falls to £9,980.

Starting rate for savings

You may also get up to £5,000 of interest and not have to pay tax on it if your general income, which does not include dividends, is below £17,570 in 2024/25, this is known as the “starting rate for savings”.

If your income is below the Personal Allowance, your starting rate for savings is £5,000. For every £1 of other income above the Personal Allowance you receive, the starting rate for savings reduces by £1. So, if your income is £17,570 or more, you will not benefit from this allowance.

How to pay tax due on your interest from savings

If you’ve discovered that your savings exceed these allowances, you will normally need to pay tax at your usual rate of Income Tax.

The good news is that you don’t usually need to do anything to pay tax on the interest earned from savings. If:

  • You’re employed or receive a pension, HMRC will change your tax code, so the tax is automatically deducted
  • You usually complete a self-assessment tax return, you can report any interest earned on savings when completing your return
  • You’re not employed, do not receive a pension, or do not complete a self-assessment tax return, your bank or building society will inform HMRC how much interest you’ve received at the end of the tax year. HMRC will contact you if you need to pay tax.

However, if the total income from savings and investments is more than £10,000 in a single tax year, you will need to register for self-assessment. So, it’s important to be aware if the amount you receive could exceed this threshold.

An ISA could be a useful way to make your savings tax-efficient

If the interest your savings have earned could be liable for Income Tax, you may want to consider using an ISA.

In the 2024/25 tax year, you can add up to £20,000 to ISAs, and they provide a tax-efficient way to save and invest. The interest you earn from savings held in an ISA isn’t liable for Income Tax, so it could provide a valuable way to grow your wealth.

You could also opt for a Stocks and Shares ISA, where your money would be invested. Once again, investing through an ISA is tax-efficient, as your returns will not be liable for Capital Gains Tax. However, you should note that investment returns cannot be guaranteed. Before you invest you may want to consider your risk profile, investment time frame, and how investing could fit into your financial plan.

Contact us to discuss how to make your savings tax-efficient

Depending on your circumstances, there might be other steps you can take to reduce your overall Income Tax bill. Please contact us to arrange a meeting to talk about how to make your finances more tax-efficient as part of a wider financial plan.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.