Savings interest is money that you earn from savings accounts or from lending money to someone (for example, on a peer-to-peer lending website).
This doesn’t apply to interest from ISA accounts – that is always tax-free.
Example of tax on savings interest:
- John earns £80,000 from salary and has no other earnings
- he opens a savings account which pays 2% interest per year
- he puts in his savings of £30,000 for a whole year and does not touch the account
- at the end John will have earned £600 in interest
- because his salary is over the higher tax rate threshold (£50,000 in 2020/21), he will have to pay higher rate Income Tax on £100 worth of interest: 40% * £100 = £40
- and because his income from savings interest and investment is under £10,000, he can either call HMRC and have them change his tax code, or file a Self Assessment tax return to pay the £40 tax bill.
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