Most people have income which is made up of a mixture of ‘earnings’ (things like wages and pensions) and ‘savings income’ (interest from bank and building society accounts).
Nearly everyone is entitled to a personal allowance, which allows you a certain amount of income that does not get taxed. If your total taxable income (earnings + savings) is more than your personal allowance, you will have to pay tax on the income that is above your allowance. The amount of your personal allowance increases with age and you can find out what your allowance is here.
See an example of how the personal allowance works.
The rate of tax will depend on the type of income you receive (earnings or savings) and how much of each type of income you receive.
Most taxable income (up to the basic rate limit of £34,800) is taxed at the basic rate of 20 per cent , but there is a special 10 per cent starting rate for ‘savings income’ (that is bank and building society interest) that you may be entitled to. The rate at which your saving income is taxable will depend on how much earnings you receive. If your earnings are less than your personal allowance plus £2320, then some or all of your savings income will be taxable at 10 per cent.
If you have a mixture of earnings and savings income you have to work out if you are entitled to have any of the savings income taxed at 10 per cent . Any savings income above £2,320 will be taxed at 20 per cent. The examples in this page show how the 10 per cent rate kicks in. If you need help or are unsure if the 10 per cent rate will apply to your savings income then contact your tax office.
If your only taxable income is savings income, you are entitled to have the first £2,320 of income above your personal allowance taxed at 10 per cent . Any savings income above £2,320 will be taxed at 20 per cent.
Banks and building societies will automatically deduct tax at a rate of 20 per cent from the interest you earn. So if you are entitled to have any of your savings income taxed at 10 per cent you will be able to claim some tax back from HM Revenue & Customs.
See more information about claiming your tax back.
The personal allowance is deducted from earnings first as this usually gives the greatest reduction in a tax bill.
See an example where a saver has no earned income.
See an example where a saver has earnings of less than their personal allowance.
