Published: 22 June 2015
What is it, who pays it and how you could save tax-free.
The content on this page is now out of date. For the most recent information visit the Personal Savings Allowance article.
Everyone who lives and works in the UK is allowed to earn a certain amount of income before they are taxed. Income that you will pay tax on includes;
- money you earn from a job or self-employed work,
- pensions,
- interest on savings accounts that aren’t tax-free,
- rental income.
Who pays savings tax?
Usually any interest on your savings is taxed, unless you are a non-taxpayer or qualify for zero tax savings. How much tax you pay on your savings interest will depend on the amount of income you earn, including pensions, benefits and salary.
If you are a basic rate taxpayer (20%), you’ll be taxed at least 20p for every £1 you earn in savings interest. This will be automatically deducted by your bank or building society.
If you are a higher rate taxpayer (40%), you’ll be taxed at least 40p for every £1 you earn in savings interest. To pay this you will need to contact HM Revenue & Customs (HMRC).
Zero tax savings
In the tax year 2015/2016 a new zero-tax band has been introduced for savings. If your annual income is less than £15,600 you may not have to pay tax on your savings interest. You will need to register with your bank or building society to do this.
Saving tax-free
An Individual Savings Account (ISA) is a tax-free account that lets you save up to a set amount without paying tax on the interest earned. For the 2015/2016 tax year you can save up to £15,240. This can be saved in a cash ISA, a Stocks and Shares ISA or a combination of the two. If you decide to save in both the total amount invested must not exceed £15,240. As with all savings accounts, the amount of interest you could earn on your savings will depend on the savings rate for the account you have. You should always check the terms and conditions to make sure the account meets your needs.
Budget 2015
In the 2015 Budget, the Government announced a new Personal Savings Allowance that will apply from April 2016. This means that from April 2016 basic rate taxpayers will not have to pay tax on the first £1,000 of interest they earn on their savings. Higher rate taxpayers will have a personal allowance of up to £500.
For more information on savings tax, visit Gov.uk
Alternatively, you can take a look at our Interest and Tax guide.
This guide is intended as a summary only and does not constitute legal advice given by Leeds Building Society. No reliance should be placed on this guide and you must make your own decisions, we recommend that you seek legal and/or financial advice if you have any questions or queries.
§ Tax-free means that interest payable is exempt from income tax. Cash ISAs are available to individuals aged 16 and over who are resident in the UK for tax purposes.
