How Much Interest Can I Earn without Paying Tax?

Understanding the thresholds and conditions for tax-free interest earning is an essential aspect of financial planning. The amount of interest you can earn without paying tax, in the UK, depends on several factors including your personal circumstances and the type of income you receive. This article will guide you through the essential aspects of this subject.

Personal Savings Allowance (PSA)

The UK government introduced the Personal Savings Allowance (PSA) in April 2016. This provision allows most savers to earn some interest from their savings without paying tax.

• For basic rate taxpayers (20%), you can earn up to £1,000 in savings interest tax-free.
• For higher rate taxpayers (40%), the tax-free allowance is reduced to £500.
• Additional rate taxpayers (45%) do not receive any Personal Savings Allowance.

For more details on the PSA, refer to the HMRC’s guide on Personal Savings Allowance.

Starting Rate for Savings

Another tax-free interest provision is the Starting Rate for Savings. Depending on your other income, you could earn up to £5,000 in savings interest without paying any tax.

• If your other income is less than £12,570, you can earn up to £5,000 in interest without paying tax.
• If your other income is between £12,570 and £17,570, your £5,000 allowance decreases by £1 for every £1 of income above the personal allowance of £12,570.

For more details on the Starting Rate for Savings, refer to the HMRC’s guide on how to apply for tax-free interest on savings.

Using ISAs to Earn Interest Tax-Free

Individual Savings Accounts (ISAs) are another way to earn interest without having to pay tax, regardless of your tax band. The interest earned on the cash held in an ISA is tax-free, and you can save up to £20,000 in the 2021/22 tax year.

For more details on ISAs, refer to the HMRC’s guide on Individual Savings Accounts.

Children’s Savings Interest

Children have their own Personal Allowance, meaning interest on their savings can be earned tax-free up to £12,570. However, if the money is gifted by a parent and the interest exceeds £100, it is taxed as if it were the parent’s income.

For more details on children’s savings interest, refer to the HMRC’s guide on tax on children’s savings.

Summary

Understanding these provisions can help you maximise your savings interest while minimising tax liability. It’s essential to stay updated with changes in the tax laws, which can be found on the HM Revenue & Customs website.