How To Avoid Paying Tax On Your Savings Interest

Carl Roberts
Carl Roberts
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Published 2024-07-25
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
All Comments (21)
  • @carlrobertsifa
    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.
  • @ds5030
    Very helpful indeed, thank you!
  • @Socrates...
    I thought that the whole personal allowance (£1000 plus £17,500) could come from interest, and be tax free, if you earned nothing.
  • @paulsotheron710
    All a bit complicated for my mind but overall sounds good. I will have a look at my options. Thank you. 👍
  • @joanneburford6364
    Enjoyed that, thank you. Interesting listening to UK tax advice and comparing it to Australia. I presume your audience is mortgage free, as a sensible place to put our $ is in offset accounts...
  • @rjScubaSki
    Premium bonds has much lower expected return than the prize rate. It all gets eaten up by the big prizes.
  • @toyami2012
    You forgot to mention joint savings accounts, any interest earned is divided by two so it reduces individual interest earned.
  • @stumac869
    That's a strip (you described it as a Guilt) and the capital gain is taxed on strips unlike Guilts.
  • @andrewfletcher4943
    You can't purchase the UK Treasury Strip online that you used as an example with a Hargreaves Landsdown trading account.
  • @keithedwards7575
    What about if living in Scotland? Are the rules the same for tax on savings ?