Tax on savings
Savings income includes all types of interest from banks and companies, and payments from insurance bonds, but not dividends. It is not easy to work out what tax rate your savings are taxed at.
Banks no longer deduct tax from the interest you receive, but if a company pays you interest, say on money it owes you, the company will deduct tax at 20%.
Where your savings income is covered by your savings allowance, personal allowance or your savings rate band, it is taxed at 0%. In that case, there is no tax to pay and you can reclaim any tax which has been deducted from that income. Any savings income not covered by those allowances is taxed at your marginal income tax rate: 20%, 40% or 45%.
The savings rate band is a maximum of £5,000, but non-savings income (salary, pension, profits and rent) eats into that. So if you have non-savings income in excess of your personal allowance (£11,000 for 2016/17) your savings rate band is reduced.
The level of your savings allowance is determined by the amount of your net taxable income after deduction of your personal allowance.
| Taxable income | Savings allowance |
|---|---|
| Up to £32,000 | £1,000 |
| No more than £150,000 | £500 |
| Over £150,000 | Nil |
You can expand your taxable income threshold by making gift aid donations or personal pension contributions, which can give you access to a large savings allowance.
Example
Colin has a net taxable income of £32,050 including interest of £1,000, so he has a savings allowance of £500. The first £500 of his interest is taxed at 0%, and the next £500 of interest is taxed at 20%. So Colin pays tax of £100 on his savings income.
Colin makes a gift aid donation of £40 net (£50 gross) within 2016/17, so his net taxable income threshold is now £32,050. As his taxable net income now lies within that threshold, his savings allowance is set at £1,000. All of Colin’s interest is covered by his savings allowance and he pays no tax on that interest. By making a gift aid donation of £40, Colin has reduced his tax bill by £100.