Since 6 April 2016, majority of individuals who have savings, no longer pay tax on any interest they earn. This is due to the introduction of Personal Savings Allowance.
This means that directors, employees and self-employed can earn up tp £6,000 worth of interest from savings tax free.
Personal Savings Allowance
- Basic Rate Taxpayers – can earn £1,000 interest per year with no tax
- Higher Rate Taxpayers – can earn £500 interest per year with no tax
- Additional Rate Taxpayers – don’t get any allowance
The personal savings allowance applies to interest earned from bank accounts, savings accounts, credit union accounts, building societies, corporate and government bonds and gilts.
Savings that are already tax-free including Individual Savings Account (ISA) and National Savings and Investments products such as Premium Bonds don’t count towards your allowance.
Starting Rate For Savings
- If your earned income is less than £16,850 – your starting rate for savings is a maximum of £5,000. Every £1 of earned income above your Personal Allowance reduces your starting rate for savings by £1.
- If your earned income is £16,850 or more – you are not eligible for the starting rate for savings.
POWER TIP
In both examples, Miss Dickinson’s total income is £42,000.
- Miss Dickinson, who is a company director, earns a salary of £9,000, receives £6,000 interest on her savings and dividends of £27,000. Her personal allowance is £11,850.
- Her wages are covered by her personal allowance, the interest is covered by the starting rate (£5,000) and the Personal Savings Allowance (£1,000). The balance of her Personal Allowance plus the £2,000 dividend allowance reduces the dividend on which tax is paid to £22,150, giving a tax liability of £1,661.25.
- If she earns a salary of £16,000, receives interest of £6,000 on her savings and dividends of £20,000. Her personal allowance is £11,850.
- She would pay tax on £4,150 (£16,000 – £11,850) of her salary (at 20% = £830). She would also pay tax on £4,150 of her interest, £6,000 less £850 balance of starting rate, less £1,000 Personal Savings Allowance (at 20% = £830). Finally, she would pay tax on £18,000 of her dividends, £20,000 less £2,000 dividend allowance (at 7.5% = £1,350). Her total tax liability is £3,010
If you have already paid tax on your savings income, you can reclaim some or all of the tax paid if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year.