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  • Writer's pictureJordan White DipPFS

How much money can I have in savings before I get taxed?

Updated: Jul 17, 2023



In a hurry? Here's the key bit:


Divide your personal savings allowance by the interest rate on your savings to get the maximum you can earn tax-free on your savings. Anything above this will be taxed at income tax rates.

With saving rates increasing, it’s important to know if you’re going to pay tax on the interest you earn on your savings.


Until recently, savings rates have been so low that it would have been difficult to earn enough interest that would mean paying tax on it.


So let’s run through a simple calculation to work out how much you could save before you would start paying tax on the interest earned.


Savings Allowances


Everybody with savings has their own savings allowance. This is the amount they can earn in interest, each tax year, without paying tax on it.


Your savings allowance is based on your salary. A bit like income tax.

  • Earnings between £17,570 and £50,270 – Savings allowance of £1000

  • Earnings over £50,270 – Savings allowance of £500

  • Earnings over £125,000 – No savings allowance (£0)

  • Earnings between £12,570 and £17,570 – Savings allowance of up to £5,000. Every £1 of other income above your Personal Allowance (£12,570) reduces your starting rate for savings by £1. Plus your £1,000 basic rate savings allowance.

Example


You earn £16,000 of wages and get £200 interest on your savings.


Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.


The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.


Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). On top of this, you will have your basic rate savings allowance of £1,000. This means you will not have to pay tax on your £200 savings interest.


1) Confirm your savings allowance based on your annual earnings.

Now you can work out the maximum amount of money you can put in a savings account without paying tax on the interest earned.


2) Confirm the interest rate you’re getting on your savings.

If you pick a fixed rate account, then you know the rate is set for a time period. For an instant access account, you’ll be assuming that rate is the same for a year.


3) Do a simple calculation on your calculator.

  • Take your interest rate and add a ‘0.0’ in front of it. For example, 3% would become 0.03

  • If your interest rate includes a decimal point, remove this. For example, 3.4% would be 0.034

  • On your calculator, first enter your savings allowance.

  • Now press the ÷ symbol

  • Now enter the interest rate number – the 0.0 – that you just created.

  • Press =

  • The result will be the maximum you can put in savings before you’d start paying tax on the interest

Example

  • I have an interest rate of 3.5%

  • This converts to a numeral of 0.035

  • I earn £40,000 a year. This means my savings allowance is £1,000.

  • My calculation is 1,000 ÷ 0.035

  • The result is 28,571.42

  • This means I can put £28,571.42 into savings before the interest I earn will start being subject to tax

So, if you put £30,000 into a saving account, you could earn interest on the first £28,571.42, as this would come to £1000 and therefore within your annual savings allowance. The amount of interest earned on anything between £28,571.42 and £30,000 would be subject to income tax rates.


Why is it good practice to work out this amount?


Well, if you’re fortunate to have a lot in savings, then the higher the interest rate, the more chance you have of paying tax on some of it!


And when it comes to savings, there are some alternative ways of saving larger sums of cash tax-free.


It also requires looking at the interest rates available across different savings accounts and products.


The common tax-free savings products are:

  • NS&I Premium Bonds and Savings Certificates

If you need to factor in paying tax on your savings interest, this effectively reduces the net interest rate you’ll get.


For example:

  • A gross (before tax) savings rate of 3% with no tax to pay is also a net (after tax) savings rate of 3%.

  • A gross (before tax) savings rate of 3% with 20% tax to pay is a net (after tax) savings rate of 2.4%

  • A gross (before tax) savings rate of 3% with 40% tax to pay is a net (after tax) savings rate of 1.8%

So once you’ve maximised the amount you can save in a standard savings account tax-free, you may then want to consider using tax-free products to allow you to continue saving tax-free cash at the best interest possible.


Of course, if the interest rates on tax-free products above can't even beat the 'net' interest factoring in tax, then you'd still be better off saving into an account that charges you tax.

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