Most our clients work hard for there money and want to safeguard the interest they earn, below we examine how much tax you need to pay, when you need to pay it & how best to minimise it.
1. How Much Can I Earn Tax Free?
All UK tax residents have an amount of interest that can be earned tax free each tax year (April 6th – April 5th), this is known as your Personal Savings Allowance (PSA).
The amount of your personal savings allowance is based on your total annual income. This includes any money you earn from employment, pensions, certain benefits, savings and investments.
The below table highlights the banding of personal savings allowance:
| Annual Earnings | Personal Savings Allowance (PSA) |
| £17,571 to £50,270 | £1,000 |
| £50,271 to £125,140 | £500 |
| £125,141 & Above | £0 |
If you earn up to £17,570 you additionally qualify for the maximum starting rate band for savings & the PSA.
In this situation you would simply deduct your income, before interest, from £18,570 & you’re left with your tax free savings allowance.
The explanation for £18,570 is it is the total of the standard personal allowance (£12,570), the maximum starting rate (£5,000) & the maximum PSA (£1,000).
2. How Much Tax Do I Pay?
There is no special rate of tax & the interest earned is subject to your full marginal rate of income tax.
As a reminder the tax rates are as follows:
| Band | Annual Income | Income Tax Rate |
| Basic Rate | £12,571 to £50,270 | 20% |
| Higher Rate | £50,271 to £125,140 | 40% |
| Additional Rate | over £125,140 | 45% |
Its worth noting that while this is technically taxable most interest is paid gross of tax and must be declared on self assessment.
The income from savings and investments is not a trigger to complete a self assessment unless it exceeds £10,000 in a singular tax year. If you are unsure if you need to complete a tax return you can check online with HMRC.
3. How Can I Minimise Tax?
Cash Individual Savings Account (Cash ISA) – Investing up to £20,000 per tax year in a tax-free wrapper, meaning any interest earned is exempt from income tax, these can also be transferred to a stocks & shares ISA at a later date if deemed surplus to requirement.
Premium Bonds – offered by NS&I (National Savings & Investments) the governments retail bank, each individual has a £50,000 maximum amount that can be held in this product.Instead of paying taxable interest, they offer chances to win tax-free cash prizes (from £25 to £1 million), the average pay out is linked to the Bank of England base rate but your individual experience may vary. Whilst the income earned from this is technically classed as winnings they are not subject to tax.
Use Spousal Allowances – You can transfer savings to your spouse or civil partner without creating any tax liabilities, allowing you to utilise both partners’ personal savings allowances, ISA & Premium Bond allowances, effectively doubling the tax-free amount available to the household.
Tip: Income earned from joint accounts is treated as 50:50 for tax purposes. It can be useful to utilise a current account in a lower earning spouses name to meet day to day expenses
If you’d like some help with your finances the please feel free to book a no cost initial consultation & see how we might be able to help you improve your personal finances.
The above does not constitute financial advice & the information provided may be subject to change, we advise seeking advice from a professional tax advisor.
About the author
Louis is a regulated independent financial advisor with a diploma in financial planning from the Chartered Insurance Institute. He founded his own financial planning firm in 2019 & has specialised in helping high earning individuals on all personal financial matters.
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