Savings and investments taxes

A lot of savers can grow their money free of tax, thanks to the ‘personal savings allowance’. The information below will show how tax on savings interest is calculated, how the personal savings allowance works and whether your investments are subject to tax.

Tax on savings accounts

Interest from savings is now usually paid gross. This means tax is not usually deducted from any interest you earn from your savings.

This also applies to interest distributions within some Open-Ended Investment Companies OEICs, Investment and Unit Trusts.

Savings interest is still included as taxable income but the introduction of the ’Personal Savings Allowance’ means that many taxpayers will no longer need to pay tax on savings interest.

As a result:

  • Basic rate tax payers can earn up to £1,000 interest on their savings without having to pay tax
  • Higher rate tax payers can earn up to £500 worth of interest tax-free
  • Additional rate tax payers, so those who generally earn more than £150,000 a year, will not benefit from the personal savings allowance
  • Any interest from savings exceeding your ‘personal savings allowance’ is liable to income tax at your highest marginal rate of income tax
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Please note that If you live in Scotland, the tax rates are slightly different.

low income starting rates for savings

The starting ‘Rate of Tax on Savings’ is aimed at supporting savers on the lowest incomes. For 2018-19 it is £5,000. This means that most people with a total income of less than £17,850, including income and savings interest, will not pay any tax on their savings.

This upper limit is higher if you are claiming the Blind Person’s Allowance (£2,390 for the Tax Year 2018-19) or the Married Couple’s Allowance (which gives an amount that’s dependent on your personal circumstances).

If you earn over £16,850 the Starting rate of Tax doesn’t apply to you. That doesn’t mean you’ll have to pay tax on savings though.

This is because for every £1 of non-savings income over £11,850, the starting rate goes down by £1. The personal savings allowance, above, adds to these tax-free savings rules, which is why you’ll normally pay no tax on savings if you earn less than £17,850.

This allows you to earn up to £5,000 in savings interest tax free and also pay no tax on up to £1,000 of savings interest as you use up your personal savings allowance.

Tax-free savings

Some savings products pay interest that is tax-free- although most savers no longer need to save into an ISA to earn interest tax free, thanks to the introduction of the Personal Savings Allowance.

Your ISA allowance for the 2018/19 tax year is £20,000, meaning you can still save tax free even if you are an additional rate taxpayer.

Tax-free savings products include ISAs and some NS&I products, such as savings certificates and Children’s Bonds (Children’s Bonds are no longer available, but if you already have them you have options.

Share-based investments

If you own shares, you may get income in the form of dividends.

Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.

If you have an investment fund that is invested in shares, then you may get distributions that are taxed in the same way as dividends.

For the tax year 2018-19 the tax-free Dividend Allowance is £2,000 a year.

Dividends above this level are taxed at:

  • 7.5% (for basic rate taxpayers)
  • 32.5% (for higher rate taxpayers)
  • 38.1% (for additional rate taxpayers)

Any dividends received within a pension or ISA are unaffected and remain tax-free.

Basic rate payers who receive dividends of more than £2,000 need to complete a self-assessment return. See the Dividend Tax Guide for more information.

Tax-efficient investments

More often than not stocks and shares ISAs are useful if you pay Income Tax at a higher or additional rate. It’s always a good idea to weigh up the pros and cons if extra charges are involved.

For the tax year 2018-19 the tax-free Dividend Allowance is £2,000.

Any profit from shares rising in value is completely free of liability for Capital Gains Tax if you hold them through an ISA.

Where the investments in your stocks and shares ISA do not pay dividends, but instead pay interest (for example, government and corporate bonds), the interest paid remains tax-free.

Additional options

There are other types of investment fund you can consider such as unit trusts and open-ended investment companies (OEICS), rather than life-insurance investments.

With these funds, part of the proceeds you receive count as income while part may come from gains due to rising share prices.

In particular,

Because you have a capital gains tax-free allowance limit (currently £11,700 for the tax year 2018/19), you could find you might pay less tax if you hold these types of investment fund rather than some life-insurance investments.