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tax-free savings

Tax-free savings & the starting savings rate

Helen Saxon
Helen Saxon
Updated 12 August 2022

If you earn less than £18,570 a year from income and savings interest, then all your savings interest will be tax-free thanks to tax-free savings and the starting savings rate. This is different from the personal savings allowance – though it complements it. This guide shows you who qualifies and how these allowances work in practice.

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What is tax-free savings and the starting savings rate?

Simply put, for most people these two terms mean that if you earn less than £18,570 a year in income and savings interest combined, you won't have to pay any tax on the interest paid on the savings. This £18,570 figure is made up of three separate allowances:

  • Your personal allowance. This is the amount you can earn without paying any income tax – for most people this allowance is £12,570 (for 2022/23).
  • The £5,000 starting savings rate. Here the tax rate is 0%, so again this is the amount you can earn in savings interest before paying any tax on that.
  • Your personal savings allowance. This is worth up to £1,000.

Those who have a personal allowance higher than £12,570 will get a higher limit for their savings too. For example, if you get the blind person's allowance, your limit would be £21,170.

For ease, to find your limit for tax-free savings, find out your personal allowance and add £6,000 to it. You can find your likely personal allowance at Gov.uk.

How does this fit in with the personal savings allowance?

The personal savings allowance (PSA) means every basic-rate taxpayer – regardless of whether they earn £20,000 or £45,000 – is able to earn £1,000/year in savings interest before paying any tax on it (and higher-rate taxpayers can earn £500 in interest).

The PSA adds to the £5,000 starting savings rate. So, if you're on a low income, you're able to earn up to £5,000 savings interest without paying tax but you'll also pay no tax on the next £1,000 of savings interest – as you use up your personal savings allowance.

How do these allowances affect the amount of tax I pay?

The amount you have as income – for example, from a job or a pension – affects whether your savings interest is tax-free. Let's take the three main scenarios for non-savings income...

  1. You earn less than £12,570. Here it's fairly simple. You benefit from both the £5,000 starting savings allowance – where you pay 0% tax, plus the personal savings allowance of £1,000. So, you can earn a total of £18,570 from income and savings interest without paying any tax.

  2. You earn between £12,570 and £17,570. Here's where things start to change...

    For every £1 of non-savings income you earn above your personal allowance, you lose £1 of your starting savings allowance

    To find your combined tax-free allowance, subtract your annual income, excluding anything you earn from savings, from £18,570. This is the amount you can earn tax-free. For example...

    If you have non-savings income of £13,570 a year, you can earn a further £5,000 in interest and pay no tax (£4,000 from the starting savings rate and £1,000 from the personal savings allowance).

  3. You earn £17,570 or more. You're taxed as normal on your income and you don't get any of the £5,000 starting savings allowance. But, you do still get the personal savings allowance relevant to your income tax bracket (£1,000 for basic-rate, £500 for higher-rate taxpayers). 

We've used the most common personal tax allowance of £12,570, but if your allowance is different, just sub your own figure in, and add £5,000 to it for scenarios two and three to understand how much interest you can earn tax free. 

How do I pay tax on saving interest if I owe it?

Your bank or building society will pay all savings interest due to you gross (without tax taken off the amount).

HM Revenue & Customs says any tax owing will be paid through changes to your tax code. So you'll get a lower personal allowance for income tax to pay any tax due on savings interest. HMRC will look at how much you got in saving interest last year and base your tax code next year on that if you went over your personal savings allowance. Those who self-assess will continue to pay through that system.

If you've had a tax code change in the past and are now earning less interest than your PSA, you'll need to contact HMRC as it will need to adjust your 2022/23 tax code to be correct.

You can call it on 0300 200 3300 or go online to your personal tax account – go to 'check your income tax' and then 'tell us about a change'. 

If you've paid too much tax on savings interest in previous years, you can reclaim it. Either fill in an R40 form to send to HM Revenue & Customs, or you can reclaim through the self-assessment tax system if you fill that in anyway.

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