How much interest can you earn tax free ?
For basic rate tax payers this figure is currently £ 1,000.00 interest per year, e.g., interest earned on bank and buildings society accounts.
For higher rate taxpayers this figure is reduced to £ 500.00 per year.
Banks and building societies now pay interest gross, free of tax year. If you have earned less than £ 1,000.00 (£ 500.00 for higher rate taxpayers), then no action is required and no tax due to be paid on your savings.
Where the interest earned exceeds your personal savings allowance, this will either be collected via your self-assessment return, or, if you do not complete a tax return, then the tax will be collected via an amendment to your tax code and your PAYE payments.
For Additional rate taxpayers, i.e., people with yearly income greater than £ 150,00.00, there is no personal savings allowance.
What qualifies as savings income ?
- Interest from banks, building societies and other savings account providers.
- Interest from Peer to Peer lending platforms.
- Income from government and corporate bonds.
- Some types of life annuity payments and contracts for life insurance.
Interest earned within ISA accounts and dividend payments are not counted, though dividends payments are subject to a separate personal allowance.
Joint account holders
Where spouses have joint accounts, the interest earned within that account will be split equally for tax purposes. Hence half of the interest earned will count towards each of the spouses’ personal savings allowance.
If one spouse is a basic rate taxpayer and the other a higher rate taxpayer, then half will count towards their allowance of £ 1,000.00 and for the other spouse it will count towards their personal allowance of £ 500.00.
It should be noted that this allowance does negate to some extent the benefit derived from a Cash ISA account, because if the ISA account generates less than your personal savings allowance, then no tax benefit is being received by holding those funds within the ISA wrapper.