Tax on savings and investments

In this section:

Tax on bank and building society accounts
Tax on UK dividends
Tax on foreign savings and investment income
Tax on buying shares
Tax on the sale of shares
Tax efficient savings and investments

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Tax on bank and building society accounts

Tax on bank and building society accounts

Savings interest normally has tax taken off at 20 per cent before you receive it. If you're a higher rate (40 per cent) taxpayer, you owe tax on the difference. If you have a low income you may be able to claim tax back.

How you pay tax on savings income

Savings income is added to your other income and taxed after your allowances have been taken into account, as follows:

savings income that falls within the £2,320 starting rate Income Tax band is taxed at 10 per cent - though in most cases it's likely to be above this limit, as it's added to your other income
savings income that rises above the £2,320 starting rate Income Tax band, but falls within the £36,000 basic rate Income Tax band, is taxable at 20 per cent
savings income that rises above the £36,000 Income Tax band is taxable at 40 per cent
if it falls on both sides of a tax band, the relevant amounts are taxed at the rates for each tax band

All of the above figures apply to the 2008-09 tax year.

Tax deducted from interest before you receive it

Savings income normally has 20 per cent tax taken off before you receive it. This is confirmed by the entry 'net interest' on your bank or building society statement.

If the entry shows only 'gross interest' - and no net interest - then no tax has been deducted. You normally have to register to receive interest gross - for more on this see 'If you're a non-taxpayer' in the section below.

Reclaiming or paying extra tax on savings interest

If you're a non-taxpayer

If your level of income means that you don't need to pay tax, you can complete a form R85 to receive interest without tax taken off. If you've already had tax taken off your interest, you will be able to claim it back.

If the starting rate for savings (10 per cent) applies to you

The rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account. So if your non-savings income is less than the starting rate for savings limit (£2,320) - or if savings and investments are your only source of income - your savings income should be taxed at the 10 per cent starting rate up to the limit.

Your interest will have been taxed at 20 per cent so you will be able to claim part of the tax back.

More about getting tax-free savings interest and claiming tax back

If you're a basic rate (20 per cent) taxpayer

If you're a basic rate taxpayer you don't need to take any action. No extra tax is due.

If you're a higher rate taxpayer

If you're a higher rate taxpayer you must let your Tax Office know what interest you have received so that we can collect the extra tax due:

If you normally complete a Self Assessment tax return you'll need to declare your savings income on your return.
If you completed a tax return during the 2007-08 tax year, but now pay your higher rate tax through PAYE (Pay As You Earn), the extra tax due on your savings will also be collected through PAYE based on the latest information we have.
If you no longer complete tax returns we may send you form P810 Tax Review, normally issued every three years, to check on your level of savings and other untaxed income, and then adjust your tax code (or ask you to complete a tax return if necessary).
If you don't normally complete a tax return but have recently moved into the higher rate Income Tax band, you must let us know what savings income you receive. We will either ask you to complete a return, or, if you're employed or receiving a pension, may arrange to collect the extra tax due through PAYE. Thereafter we will send you form P810 to check on your level of savings.

Do you need to complete a tax return?

Find out more about savings income taxed through your tax code

If your savings or other income changes significantly

Whatever your current Income Tax band, if you don't normally complete a tax return and there is a significant change to your savings or other income, you must contact your Tax Office right away so that we can work out whether you need to pay extra or less tax. By contacting us early on you can:

prevent a build up of tax owed if your income takes you into a higher threshold
avoid paying too much tax if your income has fallen below certain thresholds

Contact your Tax Office

Declaring savings interest on your tax return

If you complete a tax return you'll need to show (for your combined bank/building society savings):

the amount of interest you received after tax was deducted - the 'net amount'
the amount of tax deducted 'at source' - before you received the payment
the sum of the two above - the 'gross amount' (before tax)

There are three separate boxes for this information.

There's also a separate box to complete for any interest you received without tax deducted.

Your bank/building society may send you a 'Certificate of Tax Deducted' or a statement containing this information after the end of each tax year (5 April). If you need one but haven't received one, just ask. You can also often get the figures you need from your passbook or from your statements of account.

If you have a joint account with a husband, wife or civil partner you should declare half of the income as yours. The second half should count towards their income.

Completing a tax return

Tax-free savings interest from ISAs (Individual Savings Account)

Interest from cash ISAs is tax-free. As a result no tax is deducted at source.

Find out about saving and investing with ISAs - on the Directgov website