No matter what you’re saving up for – a holiday, a new TV or even a deposit on a house – you’ll want to make sure you’re getting the biggest return for your money. If you’re financially savvy, you’ll probably do this by shopping around a few high street savings account providers to see who offers the best interest rate for you.
However, if you’re saving your money in a standard savings account, you might be paying tax on your savings interest. Let’s take a look at how much interest you could be paying on your savings, as well as how this is set to change in the near future.
Interest on your savings is classed as income so it’s taxed like the rest of your earnings. This means that if you’re earning over £15,600 in the tax year 2015-2016, you’ll be charged 20% tax on your savings interest. So if your savings made £20 in interest in a year, £4 would be taken as tax. This is paid automatically by your account provider to the Government – you never see this money so you don’t need to worry about doing anything with it.
However, if you earn under £15,600, you might be eligible to get your savings interest tax-free. HMRC has a calculator that can help you work out if you’ll qualify for this based on how much you’re earning and if you are eligible, you’ll be able to fill in form R40 to reclaim the income tax. You can reclaim your savings interest income tax for the last four years, so it’s worth checking if you’ve been overcharged.
Alternatively, you could put your savings in an account where you’re not charged tax on your savings interest, like a cash ISA. For the tax year 2015-16, you have an ISA allowance of £15,240 – this is how much you’ll be able to save in a cash or stock and shares ISA without paying tax on the interest you’re earning. This means that if you earn £50 in interest, for example, you’ll get to keep this full amount.
This usually means that cash ISAs will offer you the best rate of return for your money but check the interest rate on any account before applying to be sure of the best deal.
Changes from April
From 1 April 2016, the rules are set to change, as the first £1,000 of savings interest you earn in a year will now be tax-free. This means that if you’re a basic rate taxpayer and you had your savings in an easy-access account at 1.5% interest, you’d have to have more than £66,600 to start paying any tax on your savings interest. The new rules are likely to mean that the majority of savers won’t pay any tax on their savings interest for the time being, until interest rates start to improve, at least.