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Tax and savings

The interest earned on most savings will count towards your taxable income, but this doesn’t mean you’ll have to pay tax on it – it all depends how much interest you earn in total and what rate of tax you pay. You can also use ISAs to protect your savings from tax. Read on to find out more.

Personal Savings Allowance

On 6 April 2016 the government introduced a new tax-free Personal Savings Allowance. Basic rate taxpayers can now earn up to £1,000 of interest on their savings each tax year (or £500 for higher rate taxpayers) without paying any tax. This is completely separate to the annual ISA allowance and other NS&I tax-free savings (see below). The interest you earn on most savings accounts is taxable so it counts towards your Personal Savings Allowance. But the interest you earn on ISAs and other tax-free savings isn’t taxable, so it won’t use up any of your Personal Savings Allowance.

Here are a couple of examples:

  1. At the start of this tax year John, a higher rate taxpayer, has £25,000 in an ordinary savings account paying 2% interest and no other taxable savings. He will earn £500 in interest on this account in this tax year, which will use up all of his Personal Savings Allowance. If he puts any more money into that account in this tax year, he will have to pay tax on the additional interest. Instead he could put up to £20,000 into a cash ISA this tax year without paying any tax.
  2. At the start of this tax year Jenny, a basic rate taxpayer, has £60,000 in an ordinary savings account paying 2% interest and no other taxable savings. She will earn £1,200 in interest on this account in this tax year, which is £200 more than her Personal Savings Allowance. This means she will have to pay tax on £200 of interest if she keeps all the money in that account. Instead at the start of this tax year she could move £10,000 from the ordinary savings account and put it into a cash ISA, then she won’t have to pay tax on any of her interest. The interest she will earn on her ordinary savings account this tax year will reduce to £1,000, the same as her Personal Savings Allowance, and the interest on the £10,000 in her cash ISA will be tax-free.

Of course, when considering where to invest your money, you have to think about the interest rate you will be earning and the rate of tax you pay before deciding whether an ISA or an ordinary savings account is best for you.

Find out more about the Personal Savings Allowance

What about other tax-free savings?

At NS&I we offer other tax-free savings that you can hold on top of an ISA. Our Premium Bonds give you the chance to win cash prizes from £25 up to a £1 million jackpot in a monthly prize draw. If you’re lucky enough to win, you won’t have to pay a penny in tax on your prize.

Find out more about Premium Bonds

And if you already hold some of our Savings Certificates, you won’t have to pay tax on the returns you earn, and they won’t count towards your Personal Savings Allowance.