All interest you receive is taxable, unless it is from an ISA, but banks and building societies don’t deduct tax from interest paid to individuals. For most taxpayers the rate of tax payable on that interest is 0%, so no tax is in fact due.
This nil tax rate applies where your savings income falls within your Savings Rate Band (SRB), which is worth up to £5,000, or within your personal savings allowance (PSA), which is worth £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. Any savings income that falls outside the SRB or PSA is taxed at your marginal income tax rate (20%, 40% or 45%).
The available SRB depends on how much taxable income you receive, other than interest and dividends. Examples include salary, pensions, trading profits or rent. If you can control the type of income you receive, you can reduce the total tax you pay for the year, just like Harry in the example below.
| Example | |||
| Harry has £80,000 of capital deposited in a bank at 3%, so he receives £2,400 of interest per year. After deducting his personal allowance (£12,570) from his salary of £18,000 he has £5,430 of taxable income, which is deemed to use up his SRB. He is a basic rate taxpayer, so has a PSA of £1,000. | |||
| 2022/2023 | Non-savings | Savings | Tax payable |
| Salary/Interest | £18,000 | £2,400 | |
| Personal Allowance | (12,570) | ||
| Taxed @ 20% | 5,430 | £1,086 | |
| PSA (max £1,000) | (1,000) | ||
| Taxed @ 20% | 1,400 | 280 | |
| Total tax payable | 1,366 | ||
| Suppose instead that Harry lends the £80,000 (on which he has been earning interest) to his company, which pays him interest at a commercial rate of 6% (i.e. £4,800) under a written agreement. The company uses the money for developing a business property. Harry reduces his salary to £15,600, so that his total income is still £20,400. Reducing his salary frees up some starting rate band to set against his interest income – see below. | |||
| 2022/2023 | Non-savings | Savings | Tax payable |
| Salary | £15,600 | ||
| Interest | £4,800 | ||
| Personal Allowance | (12,570) | ||
| Taxable @ 20% | 3,030 | £606 | |
| 4,800 | |||
| SRB (5,000-1,080) | (1,970) | ||
| PSA | (1,000) | ||
| Taxable @ 20% | 1,830 | 366 | |
| 972 | |||
| Harry’s tax bill has been reduced from £1,366 to £972 on the same level of income. The company must deduct tax at 20% from the interest it pays him but this can be reclaimed by Harry. | |||
