Chat with us, powered by LiveChat What is the tax on bank interest? | How is it calculated?

What is the tax on bank interest?

What is the tax on bank interest?
Table of Contents
    Add a header to begin generating the table of contents

    When it comes to working out your tax, it can be difficult finding answers to all of the individual questions you might have. One of the most common questions is what is the tax on bank interest? This is a widely shared question, so don’t worry, you’re not alone.

    Any interest you get from the bank is counted as another part of your earned income, and so it is taxed in the same way as your regular earnings. This means it will be taxed at the tax rate for that year, alongside your normal income.

    However, there are a few schemes and allowances that mean you don’t have to pay tax on some of the interest you gain, but this depends on your income. Simply read on to find out more about how much tax you will need to pay and how it can vary depending on how much income you receive each year.

    Do you pay tax on interest from banks?

    Generally, yes you do pay tax on the interest earned. However, there are some allowances that mean you don’t have to pay tax on the first part of your earnings.

    The amount you get tax-free depends on your income, so it is worth checking how much you are eligible for.

    How much tax do you pay on interest?

    After your allowance of tax-free interest, the rest is seen in the same way as the rest of your earnings. This means it is taxed at the normal rate for that tax year.

    How much allowance do I get on interest earned?

    For the majority of people, you will be able to take a certain amount of interest without having to pay tax at all. For the 2022/23 tax year, there are three income tax bands, 20% (If you earn between £12,570 and £100,000), 40% (If you earn between £100,000 to £125,000) and 45% (if you earn £125,000 or over).

    The government, however, has recently announced the basic tax rate of 20% is dropping to 19% in April 2023.

    There are various allowances that stipulate how much interest you can earn before you start having to pay tax on it. A few of these schemes include your personal allowance, your starting rate for savings and your personal savings allowance.

    You may benefit from these so make sure to check whether they apply to you. These benefits are applicable for the length of each tax year which stretches from April 6th to April 5th of the year after. The amount of allowance you are entitled to is different depending on your level of income, so see below how this can vary.

    Personal allowance

    The baseline personal allowance, which is generally applicable to everyone, is an amount of £12,570. This may be more if you can also claim either a marriage allowance or a blind person’s allowance. On the other hand, the amount is lower if your yearly income is over £100,000.

    Any of your personal allowance which is not used on your income (including wages and pension) can be used instead to give you tax relief from your bank interest.

    Starting rate

    The starting rate when it comes to your savings is £5,000. However, this amount is lower the more you get from any other income. If your income is over £17,570 then you are not applicable for the starting rate.

    Personal savings allowance

    This allowance means that you get a maximum of £1,000 tax-free interest. Whether you are applicable for this and how much you could get depends on which Income Tax band you are in.

    Exceeding allowances

    Once you surpass these allowances, your interest will be counted in the same way as normal income, and you will pay tax at the same rate. One notable difference if you earn over £10,000 in investments or savings is that you will need to apply for a Self Assessment tax return and report your interest in this way.

    How to know which allowances apply to you

    So what is the tax on bank interest? Hopefully, this clears things up, but if you are still confused or simply want help with your tax, WIS Accountancy can help. We are an accountancy firm with experience and understand how tricky and time-consuming taxes can be.

    For this reason, our experts are dedicated to helping you as much as possible so that you have one less thing to worry about in your busy day-to-day life.

    We are also a family of businesses, and our other branches mean we can also offer you help with mortgages through our WIS Mortgages company and assist you with business insurance through WIS Business Protection.

    Whatever we can do to help you, we will. So, if you have any questions or want assistance, call us on 0203 011 1898 or fill out the contact form.

    Frequently asked questions about tax on earned interest

    How does HMRC know my savings interest?

    In order to establish your tax code, HMRC will take into account the previous year in order to estimate the amount of interest that you will receive in the current year.

    Alternatively, if you fill out a self-assessment tax return, you will be required to report the amount of interest you have gained through savings on that.

    Is interest from my bank taxed or untaxed?

    Some of the interest you receive from your bank is untaxed. There are various schemes that indicate how much allowance for the untaxed interest you are entitled to. The website is a good way to discern this.

    After your allowances, your bank interest is taxed in the same way as normal income.

    Share This Post

    Request a Callback

    Request a Free Accounting Quote

    Would you like an accounting quote based on your requirements and business? Click on the button below and complete the form to get an accounting quote sent through to you.

    We’re available Monday to Friday (9am – 5pm)