In the UK, you aren’t required to pay tax on the money you have in savings. However, taxes may apply to the interest you earn from savings and any earned income from investing these savings.
Many people can earn a certain amount of savings income before they’re taxed on it by using their Personal Allowance, Personal Savings Allowance, or the starting rate for savings. These allowances are awarded annually, and your eligibility plus the amount of tax relief depends on your other sources of income.
However, if you don’t qualify for these schemes – or if you don’t benefit much from them due to being a high earner – you might prefer to invest cash savings in products that specifically offer tax relief, such as Individual Savings Accounts (ISAs) or pensions.
In this guide, we’ll take you through:
The information provided in this article is for informational purposes only and should not be considered as financial advice. We recommend consulting a qualified financial adviser or professional for guidance tailored to your individual circumstances. Insignis does not offer personalised financial advice, and all decisions regarding your finances should be made with careful consideration of your specific needs and goals.
There are three main types of allowances under which you might be eligible to earn tax-free interest, including Personal Allowance, Personal Savings Allowance, and the “starting rate” for savings.
Here’s a closer look at each type.
Personal Allowance is the amount of tax-free income each person is entitled to receive annually across their income sources, including interest earned from savings. The basic Personal Allowance is currently £12,570, however, this amount may be increased if you claim Marriage Allowance and / or Blind Person’s Allowance.
For high earners, it’s likely that their Personal Allowance will be used up by their other income sources. Moreover, if your adjusted gross income exceeds £100,000, then your allowance is reduced by £1 for every £2 you receive over £100,000. This means you won’t get a Personal Allowance if your taxable income is £125,140 or more.
Under Personal Savings Allowance, you might be able to get up to £1,000 of interest without paying tax on it. This applies to any interest you earn on nationwide current or savings accounts, excluding ISAs.
Personal Savings Allowance depends on your income tax band, which you can work out by adding all the interest you’ve received to your other income.
The starting rate for savings lets people claim a 0% tax rate for up to £5,000 of savings income (such as interest earned on it), provided their non-savings and non-dividend income is below a certain threshold. If your income is £17,570 or more, you aren’t eligible for the starting rate for savings.
The maximum starting rate for savings is £5,000, which is reduced by £1 for every £1 of other income you earn. In other words, the higher your other income is, the lower your starting rate for savings will be.
Any savings you have in tax-free accounts, such as Individual Savings Accounts (ISAs), don’t count towards your allowance. This means there’s no threshold for the tax-free income you earn from these accounts.
Interest earned is counted in the tax year that you can access it, which isn’t necessarily the year you earn it. Any earned interest over your allowance is taxed at your usual rate of income tax.
Here are two examples of how the tax on savings interest is determined. (Note: income tax bands are different for Scotland, so the calculations below may be different if you pay tax there).
Let’s assume you have two main sources of income, your salary and income from your savings. We’ll also assume you aren’t claiming Marriage Allowance or Blind Person’s Allowance.
Now, let’s say in the 2024/25 tax year, you earned £100,000 in salaried income and £3,000 in savings income (e.g., from interest), meaning your total income is £103,000.
This means:
In this example, we’ll again consider your main income sources as your salary and earnings from savings. Let’s say you earned £300,000 in salaried income in the 2024/25 tax year, and £5,000 in savings income, bringing your gross income to £305,000.
This means:
The way to pay tax on savings income depends on how you pay tax on your other income—i.e., whether you’re employed, on a pension, self-employed, or none of these.
If you’re not employed and don’t self-assess, HMRC will get in touch if you owe any tax on savings interest.
If you’ve paid too much tax on your savings, the good news is that you can claim overpaid savings tax for the current and previous four tax years.
You can do this by either:
It usually takes around six weeks to receive your overpaid tax back.
High earners don’t benefit much from tax-free allowances, if they qualify at all.
That’s why many look to other tax-free savings options for earning savings income. These options aren’t just popular for high earners, but for anyone looking to earn from their savings without being taxed.
Here’s an overview of the main options.
Individual Savings Accounts (ISAs) act as a shelter for savings from tax; you aren’t required to pay income tax on any interest or dividends earned within an ISA. Additionally, any profits from investments made from ISAs aren’t subject to capital gains tax.
There are several types of ISAs, including:
The government limits the amount that each individual can invest in ISAs each year. The limit is £20,000 for the 2024/25 tax year.
For Lifetime ISAs, the most you can pay-in is currently £4,000 annually, which deducts from your £20,000 limit. This means if you invest the maximum £4,000 into a LISA in a given tax year, you can still pay £16,000 into other ISAs that year.
The UK government provides tax relief on pension contributions to help people save for retirement. The tax relief you receive is based on the income tax rate that you’re required to pay.
Depending on your pension scheme, this relief can be either:
The tax relief you can receive on a pension is subject to HMRC’s annual allowance limits.Learn more about how much savings a pensioner can have in the bank here.
Parents and guardians can set up a child pension to save for their child’s future retirement in a tax-efficient way. Once they’re set up, anyone can contribute to these pensions.
With a child pension, you can save up to £2,880 in the account per tax year – which runs from April to April. The government then contributes £720 to the account, i.e., a tax relief of 20% on your total contribution, bringing the contribution to £3,600 per year, per child. The child becomes the owner of the pension once they turn 18.
National Savings and Investments (NS&I) is the only bank in the UK backed by a government department, the HM Treasury. Unlike most UK banks, NS&I is only for savings; it doesn’t lend money, such as mortgages or credit cards.
NS&I offers several savings and investment products, but the bank changes its products frequently, meaning some might not be available at a given time. Some of the bank’s products offer tax-free returns, including Cash ISAs, Junior ISAs, and Premium Bonds.
Premium Bonds operate as a monthly lottery; people purchase bonds priced at £1 each – up to a value of £50k. The bonds are entered into a prize draw each month, with a 1/21,000 chance per bond of winning a prize each month, which can be anything from £25 to £1 million. This equates to a 3.3% average annual return, free from income tax.
Although the UK government provides tax-relief allowances for cash savings, they aren’t particularly helpful to high earners and people with a larger amount of savings. High earners don’t qualify for the starting rate of savings, and their Personal Allowance is usually used up by their salary.
Fortunately, several savings products, such as Individual Savings Accounts (ISAs), pensions, and certain NS&I products, offer tax benefits, subject to annual limits and eligibility. However, researching and managing these options can be time-consuming, especially when working with multiple providers.
While Insignis does not offer tax-wrapped products like ISAs or pensions, we provide access to a wide range of deposit accounts through one platform.
This can help you:
With a single Insignis Account, you can explore selected deposit accounts from banks and building societies across the UK.
Learn what Insignis can do for your personal savings.
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