How To Avoid Paying Tax On Your Savings Interest

Recent data from HM Revenue and Customs (HMRC) shows that people are probably not doing enough to avoid paying tax on their savings interest.

For the 2023/24 tax year the amount of Income Tax collected from UK savers was around £6.6billion. This is nearly double the amount collected in 2022/23.

What’s more, HMRC predict that the amount collected for the 2024/25 tax year will be around £10.4billion.

This is tax you may be paying on the interest you earn on your cash savings.

You do not need to leave your cash savings exposed in this way as there are plenty of valid, legal ways to avoid paying tax on your savings interest.

Let’s just remind ourselves how tax works on savings interest.

When your bank pays you interest on the cash you hold with them, that interest payment is potentially subject to Income Tax.

Before 6th April 2016, banks paid interest with an automatic deduction for basic rate Income Tax. So, you would have received your interest net of basic rate tax.

Since 6th April 2016, banks have paid interest gross. So, there is no automatic deduction for any Income Tax, you receive the full amount of interest.

At the same point in time a new Personal Savings Allowance was bought in.

It allows you to earn up to £1,000 of interest tax free if you are a basic rate Income Tax payer and £500 tax free if you are a higher rate Income Tax payer.

There is no Personal Savings Allowance if you are an additional rate Income Tax payer.

Banks now report all of your interest payments to HMRC, so they know what interest you have been paid.

There is also further relief for savers who have little or no income by way of the starting rate for savers.

If your income from other sources like employment or pensions is below £17,570 then you could potentially earn up to £5,000 in savings interest tax free.

The £5,000 starting rate reduces by £1 for every £1 you earn over the Personal Allowance of £12,570.

So, for example, someone who earns income from a job of £14,000 could receive a further £3,570 in savings interest without paying tax on this interest.

Plus, they would still have their Personal Savings Allowance as well.

The reason why recent HMRC tax receipts from savings interest is increasing and expected to increase further is two-fold.

HMRC have said: “Income from savings is significantly more in 2024 to 2025 (approximately six times greater than 2021 to 2022), largely due to the actual and forecasted changes in bank and building society interest rates following the large reductions in bank and building society interest rates up to the end of 2021”.

As we all know interest rates on savings were low for a long time, so now they have increased, it’s only natural that tax revenue will increase.

However, there is a second factor as well and this is the frozen Personal Allowance. This is the amount of money you can earn before paying any Income Tax.

From the period 2014/15 to 2021/22 the Personal Allowance increased from £10,500 to £12,570. An average yearly increase of 3.06%.

Since 2021/22 the Personal Allowance has remained frozen at £12,570 and is currently scheduled to remain that way until 2026.

Had we continued the average increases since 2014/15 the Personal Allowance should now be £13,758 and £14,179 by the time we get to 2026.

Earnings from work and State Pension will generally increase each year to help cover the rising cost of living.

So, this type of income is taking up more and more of the Personal Allowance and beyond leaving no room for income earned from savings interest.

This in turn pushes everything up the tax bands. So, if you’re a basic rate taxpayer and paid more, you might find yourself falling into the higher rate tax bracket and some higher rate taxpayers might fall into the additional rate bracket.

Earnings are taxed first, so savings interest is added on top of earnings. The last thing you want is your savings interest falling into a higher tax band meaning you lose 40% or even 45% of the interest.

That 5% interest rate doesn’t look as good if you only end up receiving 2.75% after tax.

Thankfully, there are plenty of ways to avoid tax on savings interest.

Now because interest rates have gone up and the Personal Allowance has been frozen it doesn’t take holding a lot in cash to start paying tax.

So here are six ways to avoid paying tax on savings interest.

#1 – Check how much you actually need to hold in cash
#2 – Use your ISA allowance
#3 – Use Premium Bonds
#4 – Use Pensions
#5 – Use UK government Gilts
#6 – Use your partner’s allowances

Don’t pay more tax if you don’t need to.

#taxonsavings #savingstax #avoidtaxes

[carlrobertsonmoney]

Apologies for the confusion around the Gilt shown in the HL section. This isn't actually a Gilt but a Strip instead and is subject to tax however the principle applied in the calculations are still appropriate to Gilts that you buy at a discount. No CGT applies.

[Erikkurilla]

In the 1990s I sold pensions on the strenght that the tax free lump sum would pay off most if not all of the mortgage and leave the investor with a pension for life. Most were over a 40 year term plus, I was not alone.

[IamJonny-ov]

Tax laws can be so complex, and it’s super helpful to break them down like this. Understanding how different policies can impact our finances is crucial for making informed decisions.

[EleanorMabel]

I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for.

[markstill]

It’s a rip off interest rates that don’t keep up with inflation and your money still devalues every year and then they tax you on the interest. Thanks for those tips

[davidheppenstall]

Excellent explanation of how to minimise tax on savings . Mention of short dated government bonds was particularly useful - I didn’t know about that.
0:20 0:20

[alisonjones]

Excellent.. more please. Very clear and concise

[patriciabailey]

Thank you. I am hopeless when it comes to monetary issues - I don’t grasp figures easily- and so will have to watch again. Thanks for being here

[ladygardener]

This is the most usefull discussion for UK pensioners, and would be pensioners.

[seanaidan]

Thanks but a video for retired people with savings would be good 👍

[HelplessHawk]

Ive been declaring my tax on my savings. Nearly £800 this year...i pay tax on everything. Looking forward to sitting down and watching this episode 🙂

[gingerkilkus]

These frequent tax code changes are disrupting my long-term investment strategies. Are there ways to structure my investments to be more resilient to potential tax code modifications?

[ryanharriss]

Very useful! Thanks. Some of these I have never thought about.

[wendybrierley]

When the interest rates were very low for years like you said, I put in a fixed saving account for 5 years.
And receiving the interest of about £2500 over 5 years, thinking it is only £500 per year for each year of the Personal Saving Allowance of £1k per annum.
Wrong!
I was allowed £1k tax free and the rest was taxed by HMRC. Nobody told us that we should withdraw interest every
year to avoid income tax until too late.
This can still happen to people fixing their Saving years and withdrawing interest in the end thinking of compound interests will be tax free. No, Very annoying!
Carl please tell people that esp. with bigger fixed saving earning bigger than £1k interest per year for Basic Tax payers.
It still hurts.

[pointblankracer]

"A fair tax is every bit as absurd as a fair theft"

[danpalmer]

This was extremely useful as i am having to retire soon on medical advice and
want to avoid greedy taxman making me pay tax twice.

[yqwkygs]

That was all crystal clear. Knew some of it already but had it confirmed. Best of all, learned a few new things. Thank you! Liked and subscribing.

[HughJason]

Very clear and helpful, especially on gilts.. Thank you.

[carlossoler-my]

Post election is one of those things that could really contribute to portfolio growth and vice versa. I've been going hard with my investments this year and have been able to build up to 180k, Are there tips I could apply to help me grow my portfolio even more during this election season?

[phylroberts]

Thanks Carl, this all sounds like useful information.