Tax on Interest

If your savings or investments are held within an Individual Savings Account (ISA) or pension you will not have to pay any tax on the income or growth. 


The Personal Savings Allowance was launched by the Government and means that from April 2016 basic-rate taxpayers, those paying 20pc tax, can earn £1000 income on their savings tax free.  Those who are higher tax payers, paying 40pc tax, will get a £500 tax-free savings income limit, whilst highest rate taxpayers get no allowance.  If your total taxable income is less than £17,000 you won’t pay tax on any savings income.


The change means that, where previously most banks and building societies paid interest after 20pc tax had been taken, now they pay it pre-tax.  Only certain interest counts towards this limit, including bank, building society and National Savings and Investments Account interest, corporate or government bond payments and interest (but not dividend) income from some investments.

If your interest comes from investment income that will be covered by a different tax break – the dividend tax-free allowance.  This allowance meant that from April 2016 investors could earn up to £5,000 of dividend income a year before paying tax.  However, this is reducing to £2,000 from April 2018.  Anyone who is earning more than the current £5,000 limit will need to pay 7.5pc tax on the income if they are basic rate taxpayers, 32.5pc for higher rate taxpayers and 38.1pc for highest rate taxpayers.

John BaxterComment