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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 (£2,440 tax year 2009-10)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 (£2,440 tax year 2009-10) starting rate Income Tax band, but falls within the £34,800 (£37,400 tax year 2009-10)basic rate Income Tax band, is taxable at 20 per cent
• savings income that rises above the £34,800 (£37,400 tax year 2009-10) 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
  

Most peoples' savings income will continue to be taxable at 20 per cent (and 40 per cent for higher rate taxpayers), but depending on their personal circumstances, some individuals will have savings income taxable at 10 per cent. 

HM Revenue & Customs (HMRC) have published detailed guidance to explain when someone will have savings income taxable at the 10 per cent starting rate for savings.

• Guidance on 10 per cent starting rate for savings Opens new window

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)(£2,440 tax year 2009-10) - 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.

• Guidance on 10 per cent starting rate for savings Opens new window

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 they can collect the extra tax due: 

• Understanding Self Assessment
• Do you need to complete a tax return?

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 they can work out whether you need to pay extra or less tax. By contacting them early on you can:

• Contact details for all Tax Offices Opens new window

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):

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 (April 5). 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

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

• More information on saving and investing with ISAs

More useful links

• Find out if you need to fill in a Self Assessment tax return
• How to file your tax return online
• Children's savings schemes and accounts
• More information about managing money