In the current tax year, you can enjoy some savings income tax-free within certain limits. The availability of these tax-free routes depends on your tax rate.

The New Savings Allowance

Both basic and higher rate taxpayers have a savings allowance in addition to their personal allowance. For the 2024/25 tax year, the savings allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This allowance is in addition to the personal allowance and the dividend allowance. Any unused portion of your personal allowance can be applied to your savings income, allowing it to be received tax-free.

With rising interest rates, basic and higher rate taxpayers might now receive interest exceeding their savings allowance, which is taxable and must be reported to HMRC via a Self-Assessment tax return. If this applies, you must register for Self-Assessment if you haven’t done so previously.

Taxpayers paying the additional rate (applicable to taxable income over £125,140) do not benefit from a personal savings allowance and must pay tax on all savings income unless it is exempt. They also do not receive a personal allowance, as it is fully abated at this income level.

Savings Starting Rate

Savings income falling within the savings starting rate band is taxed at 0%. Depending on personal circumstances, you might enjoy up to an additional £5,000 of savings income tax-free.

The savings starting rate band is £5,000, but it is reduced by any taxable non-savings income (excluding dividends, which are considered the top slice of income). Therefore, the full £5,000 savings starting rate band is available if other taxable income is less than your personal allowance. For 2024/25, the standard personal allowance is £12,570. The savings starting rate is gradually reduced as taxable income exceeds the personal allowance and reaches £5,000.

The savings starting rate is applied before the personal savings allowance.

Tax-Free Savings Accounts (ISAs)

Savings held in tax-free wrappers such as Individual Savings Accounts (ISAs) are tax-free. You can invest up to £20,000 in an ISA in 2024/25.

Maximize Your Tax-Free Savings Income

By fully utilizing your personal allowance against your savings income, you can receive therefore up to £18,570 in tax-free interest in the 2024/25 tax year. This amount is composed of:

– Personal Allowance £12,570

– Savings Starting Rate Band: £5,000

– Personal Savings Allowance: £1,000

Additionally, any interest earned from tax-free savings accounts, such as ISAs products, can further increase your tax-free savings income.