How do tax on savings work?

[Newtom]

Forgive my ignorance but have never had enough money for this to be an issue.

If I have 40k in savings. What do I actually pay tax on?
If I put 20k in and isa and 20k in a savings account for example with 6 percent. Would I only pay tax on the 6 percent interest on the savings account ? The isa would be tax free?

What if I save all of the 40k in the 6 percent account. Would I pay tax on it all the interest?

I have a job with basic rate tax. How does it all work?

You pay tax on the interest only, but most institutions would pay the interest net of tax anyway, so you don't have to do anything at all.

Some savings plans such as ISAs are tax-free.

Check out this Gov.uk page for all the info on savings interest tax:

www.gov.uk/apply-tax-free-interest-on-savings

Anything in an ISA is tax free interest.
Other savings accounts are potentially taxable, but there is a personal savings allowance that means that (probably) in your case, you can earn up to £1000/yr in interest tax free. Beyond that, you will need to pay tax on the interest. But check the above page to be sure for your own circumstances.

Actually, I believe most pay interest Gross now, because of the variability of people's circumstances, and it's up to individuals to declare for themselves.

Thanks
So does the bank automatically take the tax?

The banks don't take the tax, or they haven't up to now. But obviously this is becoming more of an issue and people will be paying tax on savings above 'only' £10/20k.

The banks report interest paid to HMRC at the end of each financial year. It could well be that people will then get tax bills, or will have their PAYE code adjusted if relevant.

Banks no longer automatically take the tax, as most people don’t earn enough in investment income to have to pay tax on.

If you do, HMRC are likely to calculate your tax, and collect it via PAYE, or if you have to prepare a Self assessment tax return, they collect it that way.

Put as much as you can in ISAs as the income from them is tax exempt.

No, not normally - but do check the T&C's of the account you are opening, and it will tell you for definite.

If you have an ISA, there is no tax to pay on the interest.

(Worth noting that you also don't pay tax on any Premium Bond winnings, which is another very safe and easy option for saving, if the tax side feels like too much hassle)

Really confused now. So will ai have to do some sort of tax return if my savings grew. 🤦‍♀️🤦‍♀️

This is why I like PAYE.

I've been putting savings for a house deposit into a savings account.

I have to pay tax on this?

I have to pay tax on savings which I have already paid tax on? It literally gets paid in from my salary.

You may potentially have to pay tax on the INTEREST you earn (not on your original capital that you invest).

www.gov.uk/apply-tax-free-interest-on-savings

I got a letter from HMRC saying I owed them £300 - odd tax on my interest last tax year. They said they would take it by altering my tax code for 2024-2025 so I paid it in equal instalments.

If you are a basic rate tax payer you have a tax free allowance of £1,000 in savings income. So you can earn £1,000 in interest before paying any tax on it.
Interest from an ISA is tax free.
Banks pay interest gross of tax, so you would be responsible for reporting and paying over any due. How much interest do you expect to earn this tax year?

At the end of the financial year your bank will send you a statement saying how much interest you have received.

If tax was deducted it will say so in this statement but I think nowadays tax is not usually deducted.

If you have earned more than £1000 in interest in total you will have to do a HMRC tax self assessment and pay tax on the interest over £1000.

Do they? Mine doesn't.

How does that work then, because the overwhelming majority of people do not complete their own tax return, it is all done by PAYE.

IIRC Banks stopped deducting tax years ago. All interest is paid tax free and it is each person's responsibility to declare interest exceeding £1000 pa so tax due can be calculated.

(Except ISA interest as that's totally tax free so no need to declare that interest at all).

My savings are tax paid, so I don’t have to do anything. My ISA’s are tax free.

Even if all your income is under PAYE you can still complete Tax Returns to declare your interest and your PAYE income and tax.

I don't know if there is a more simple form to just declare interest nowadays.

You can have more than £1000 in interest per year but only if you have a very low income of £17570 or less.

You have to pay tax on any interest earned over £1,000, the first £1,000 is tax-free and interest earned from ISAs is tax free. The bank will report your taxable earned interest to HMRC.

As far as I can tell, if the only reason you need to pay more tax is because your interest is over £1,000, HMRC operate a 'simple self assessment' system and will write to you and let you know how much tax you owe. They will either adjust your tax code to recover the tax or they will ask you to pay the tax.

This is purely personal experience of dealing with MIL's tax, she has substantial bank savings but no longer needs to complete a tax return. She is a pensioner, I don't know if this would apply to everyone.

No they don’t

They used to but not anymore

This is such a mess - it wasn't an issue for many people before, but now that interest rates are relatively high, it's affecting much more people (who, like me, aren't exactly sure how this works).

Its very unlikely that your savings interest is paid net of tax

If you have £20k in savings at 4%, that earns interest of roughly £800py. If you are a basic rate taxpayer you have £1,000 savings interest allowance so no tax to pay on the £800.
If you are a higher rate tax payer, you get a smaller allowance. If you are a very low earner you get a higher allowance.
ISA interest / dividends / growth are always free of tax.

The govt really needs to raise the allowances to avoid a whole load of mess and pissed off taxpayers being penalised for modest savings.

Uk banks do not pay interest net of tax and haven’t done for years now. Until recently this hasn’t been an issue as you would need huge amount in savings to earn over the £1,000 savings allowance (or £500 for higher rate taxpayers).

But for your £40,000 you’d only need to get interest of 2.5% to earn £1k in interest which is fairly easy these days.

Then any interest over the £1,000 incurs tax at 20% (up to basic rate band and then 40%) which HMRC will likely write to you about as they have information sharing with banks.

will be interesting to see what happens as this is going to bring so many people into self assessment that otherwise have no need to be, and HMRC already can’t deal with the workload they have.

Which bank is that?Interest has been paid gross for years