Q: Last year I earned £4,500 approximately from making interest on my savings. I’ve never come close to earning anywhere near that much previously so I’m not sure about the rules. I realise that there are potential tax implications but I’m not sure exactly what I need to do. Can you please explain?
A: There are a few things to mention here for yourself and others who want to understand about the tax implications on interest made from savings.
Firstly, there’s something called the Starting Rate for savings. But it depends on your circumstances – specifically what you are earning – whether you’re eligible for it or not. For those of you who are eligible, you can earn up to £5,000 in savings interest and not have to pay tax on it.
In your case, we won’t be able to say for sure whether this applies or not as we don’t know what you currently earn per year – or if you are still in work or retired. Essentially, the higher your income – be that your salary from a job or a pension or something else, the less you are eligible to claim on the Starting Rate.
In fact, you will not be eligible for the Starting Rate if your total income per annum is £17,570 or more. But if it is lower, then the maximum is £5,000. And for every £1 of income above your annual Personal Allowance of £12,570, your Starting Rate goes down by £1.
For example, say you earn £15,000 per year in terms of a salary. To calculate what your Starting Rate is you’d subtract the Personal Allowance, giving you £2,430. This is the figure by which you would reduce your Starting Rate. So, the left over amount – £2,570 – is the Starting Rate you qualify for. In your case, therefore, having earned £4,500 in savings interest, you are over the limit. So, you’d have £1,930 in savings interest that you need to pay tax on. However, that is only taking the Starting Rate into account.
There’s also the Personal Savings Allowance. For basic rate taxpayers that is £1,000. And it can be added to the figure for the Starting Rate for savings. In the scenario outlined above, this extra allowance would reduce the amount of savings interest that you need to pay tax on to £930.
As alluded to, we’d need to know more about your personal situation to provide a full and accurate answer on your tax obligations in regard to your question, but please give our team a call and we’d be happy to help.
