Clark Galvan
Whether you pay tax on your savings and investments depends on your total annual income, including any money you earn from employment, pensions, certain benefits, savings and investments and any reliefs or exemptions. Most investment income will be taxed at your usual income tax rate, so will count towards your Personal Allowance. However, there’s a separate tax-free allowance if you own shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax on it.
| Characteristics | Values |
|---|---|
| Tax-free allowance for savings interest | No |
| Tax on savings interest | Yes |
| Tax on investment income | Yes |
| Tax on dividend income from shares or funds | Yes |
| Tax on interest distributions from authorised unit trusts, open-ended investment companies, investment trusts and most types of purchased life annuity payments | No |
| Personal Savings Allowance (PSA) | Covers interest from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts |
| Personal Allowance | Up to £5,000 from your starting rate for savings |
What You'll Learn
Personal Savings Allowance (PSA)
The Personal Savings Allowance (PSA) covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies (e.g. US dollars, euros) held in UK-based savings accounts. Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance (you have a separate allowance for that). The PSA does include interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts and most types of purchased life annuity payments.
The PSA is a tax-free allowance for savings interest. This means that you won't pay tax on the first £5,000 of interest you earn from savings. However, it's important to note that this allowance is based on your total annual income, including any money you earn from employment, pensions, certain benefits, savings and investments. For example, someone with a £6,500 salary can earn £12,070 in tax-free interest (£18,570 minus £6,500).
Most investment income will be taxed at your usual income tax rate, so it will count towards your Personal Allowance. However, there are some tax-free allowances for specific types of investments, such as shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax. Dividends are a portion of a company's profits that are paid to shareholders periodically during the year.
It's estimated that more than 95% of savers don't pay any tax on their savings interest due to the PSA. This is because the allowance is relatively high compared to the average amount of interest earned on savings. However, it's important to remember that if you earn more than your allowance, HMRC will usually change your tax code so that you pay tax automatically. You may also need to declare savings interest if you use a self-assessment tax return.
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Personal Allowance
Your Personal Allowance is the amount of income you can earn before you start paying tax. This includes any money you earn from employment, pensions, certain benefits, savings and investments. For the 2024/25 tax year, the standard Personal Allowance is £12,570.
If you have a salary of £6,500, for example, you can earn £12,070 in tax-free interest. This is calculated by taking the total annual income of £18,570 and subtracting your salary. Similarly, someone with a salary of £14,500 can earn £4,070 in tax-free interest, as their total annual income is £18,570.
Most investment income will be taxed at your usual income tax rate, so it will count towards your Personal Allowance. However, there is a separate tax-free allowance for dividends if you own shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax. Dividends are a portion of a company's profits that are paid to shareholders periodically during the year.
The Personal Savings Allowance (PSA) covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies held in UK-based savings accounts.
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Tax-free interest
The amount of tax-free interest you can earn depends on your total annual income, including any money you earn from employment, pensions, certain benefits, savings and investments and any reliefs or exemptions. For example, someone with a £6,500 salary can earn £12,070 in tax-free interest, whereas someone with a £14,500 salary can earn £4,070 in tax-free interest.
Most investment income will be taxed at your usual income tax rate, so will count towards your Personal Allowance. However, there is a separate tax-free allowance if you own shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax on it.
The Personal Savings Allowance (PSA) covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies (e.g. US dollars, euros) held in UK-based savings accounts. Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance.
Savings interest is usually paid gross, meaning tax isn't already taken off. Most people are allowed to earn a certain amount of tax-free interest every tax year (6 April to 5 April). Interest in a joint account is usually split equally for tax purposes.
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Tax on dividends
Dividends are a portion of a company's profits that are paid to shareholders. Dividends are taxed separately from other income, and the tax rate depends on your income tax band. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax. Above this amount, you will pay dividend tax based on your income tax band.
Dividend income from shares or funds is not included in the Personal Savings Allowance (PSA). However, you have a separate allowance for dividend income. The PSA covers interest earned from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies held in UK-based savings accounts and peer-to-peer lending interest.
Most investment income will be taxed at your usual income tax rate and will count towards your Personal Allowance. However, there is no tax-free allowance for savings interest, and you will pay tax on everything earned. Your Personal Allowance for all income is up to £5,000 from your starting rate for savings, so you can earn interest without paying tax.
Depending on how much you earn, you might have to pay tax on savings interest or investment income. Savings interest is usually paid gross, meaning tax isn't already taken off. Most people are allowed to earn a certain amount of tax-free interest every tax year (6 April to 5 April). Interest in a joint account is usually split equally for tax purposes. If you earn more than your allowance, HMRC will usually change your tax code so you'll pay tax automatically.
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Tax on investment income
Most investment income will be taxed at your usual income tax rate, so will count towards your Personal Allowance. However, there is a separate tax-free allowance if you own shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax on it. You will pay dividend tax over this amount, based on your income tax band.
The Personal Savings Allowance (PSA) covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies (e.g. US dollars, euros) held in UK-based savings accounts. Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance. The PSA does include interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts and most types of purchased life annuity payments.
Depending on how much you earn, you might have to pay tax on savings interest or investment income. You won’t be taxed on the cash you have, but you might pay tax on savings interest you get. Savings interest is usually paid gross, meaning tax isn’t already taken off. Most people are allowed to earn a certain amount of tax-free interest every tax year (6 April to 5 April). Interest in a joint account is usually split equally for tax purposes. If you earn more than your allowance, HMRC will usually change your tax code so you’ll pay tax automatically.
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Frequently asked questions
You can earn up to £5,000 in interest without paying tax. This is your starting rate for savings.
Most investment income will be taxed at your usual income tax rate, but there is a separate tax-free allowance if you own shares. For the 2024/25 tax year, you can earn up to £500 in dividends without paying tax.
The PSA covers any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts. It also includes interest earned on other currencies held in UK-based savings accounts.
