Tax on interest from a savings account

[Davo123]

If my income and interest combined are less than my personal allowance do I pay any tax on my interest?

This year I forecast my income to be around £6000 and interest from savings accounts to be £2000. Would any tax be due?

Thanks

[Glosphil]

No. Interest between your earnings & £17.5k is tax free.

[Eric Mc]

Everybody gets an annual tax free allowance of £12,570. There is also an additional allowance of £1,000 to cover interest income.

Your combined income from all sources is well under the £12,570 and the £1,000 interest allowance so no tax to pay.

[Reginald Molehusband]

Doesn't interest allowance go up to £5000 if other income is less than your personal allowance?

Edited by Reginald Molehusband on Tuesday 28th February 11:15

[Davo123]

Thanks for the replies

[Mogul]

The Personal Savings Allowance remains at £1,000.

If total income from employment, pensions, and savings interest is less than £18,570 then up to £5,000 of interest can be subject to the 0% rate so someone could earn a total of £18,570 with £0 tax payable.

+£12,570 of wages/pension covered by the Personal Allowance
+£1,000 of bank interest covered by the Personal Savings Allowance
+£5,000 of bank interest taxed at 0% (this is the poorly named and widely misunderstood ‘Starting Rate for Savings’)

https://www.gov.uk/apply-tax-free-interest-on-savi...

The curious thing about how the Starting Rate for Savings is applied is that you lose it if your earned income exceeds the Personal Allowance on a £ for £ basis.

i.e. if the person above earned an extra £1,000 of wages/pension, they would be exposed to a 40% marginal tax rate as the extra £1,000 of earned income would be taxed at 20% (£200) AND they would only have £4,000 of the 0% Starting Rate for Savings so, in effect, there would be another £200 of tax.

i.e., £400 tax to pay just because of that extra £1,000 of wages/pension.

'#theJoyOfTax

Edited by Mogul on Tuesday 28th February 13:47

[Reginald Molehusband]

Thank you. I will settle down with a cup of tea shortly and read that carefully, and then again, and perhaps a third time. Maybe then it will sink in, maybe not.

Being retired I am living on investments drawdown, the state pension, income from dividends and interest. So it is quite pertinent, especially since I will be completing my own tax return this year and not depending upon my accountant to do so.

Edited by Reginald Molehusband on Tuesday 28th February 14:29

[Mogul]

...and if you add dividends into the mix, there is an extra £2,000* of Dividend Allowance so someone could earn £20,570 pa with no income tax to pay this 2022/23 tax year...

+£12,570 of wages/pension covered by the Personal Allowance
+£1,000 of bank interest covered by the Personal Savings Allowance
+£5,000 of bank interest taxed at 0% (this is the poorly named and widely misunderstood ‘Starting Rate for Savings’)
+£2,000 of dividends

'* sadly the Dividend Allowance halves to £1,000 for 2023/24 because of reasons...

(and of course, any income produced by an ISA would always be tax free)

[Eric Mc]

Reginald Molehusband said:

Thank you. I will settle down with a cup of tea shortly and read that carefully, and then again, and perhaps a third time. Maybe then it will sink in, maybe not.

Being retired I am living on investments drawdown, the state pension, income from dividends and interest. So it is quite pertinent, especially since I will be completing my own tax return this year and not depending upon my accountant to do so.

Edited by Reginald Molehusband on Tuesday 28th February 14:29

Just free advice from accountants on PH

[Reginald Molehusband]

Which is very much appreciated

[Simpo Two]

Mogul said:

...and if you add dividends into the mix, there is an extra £2,000* of Dividend Allowance so someone could earn £20,570 pa with no income tax to pay this 2022/23 tax year...

+£12,570 of wages/pension covered by the Personal Allowance
+£1,000 of bank interest covered by the Personal Savings Allowance
+£5,000 of bank interest taxed at 0% (this is the poorly named and widely misunderstood ‘Starting Rate for Savings’)
+£2,000 of dividends

'* sadly the Dividend Allowance halves to £1,000 for 2023/24 because of reasons...

(and of course, any income produced by an ISA would always be tax free)

I doubt many people get the £5,000 bank interest bit, but don't forget the CGT allowance, approx £12K this year but only £6K next year.

[Mogul]

You can of course earn ‘interest’ from more than a typical bank/savings account..

“Investors may receive income from their investment in the form of interest or dividends. This will depend upon the mix of the underlying assets within the fund and will determine how income is taxed.

Where the market value of the fund is made up of more than 60% of cash or fixed interest securities such as gilts or corporate bonds, the fund will be classed as a non-equity fund and income is treated as interest.”