Money Advice Service

Most people can benefit from interest on their savings free of tax, thanks to the ‘Personal Savings Allowance’. People on low incomes also benefit from the Starting Rate for Savings. This guide will help you get to grips with how tax on savings interest is calculated, how the personal savings allowance works and whether your investments could be subject to tax.

The starting rate for savings if you’re on a low income

The starting rate for savings is aimed at supporting savers on the lowest incomes.

For 2018-19 it is £5,000. This means that up to £5,000 of the interest received from savings is tax-free.

You can earn up to £16,849 a year and still be eligible for the starting rate for savings.

This upper income limit is higher if you’re claiming the Blind Person’s Allowance (increasing the amount you can earn by £2,390 for the Tax Year 2018-19 to £19,239) or the Married Couple’s Allowance (which gives an amount that’s dependent on your personal circumstances).

The starting rate for savings is reduced by £1 for every £1 you earn over the Personal Allowance. The Personal Allowance is the amount you can earn tax-free from non-savings income like a job or pension, and is currently £11,850.

For example, someone with a salary of £14,500 per year and interest on savings of £150:

Income Personal Allowance Amount earned over the Personal Allowance Remaining amount for savings interest that can be tax free
£14,500 £11,850 £14,500-£11,850 = £2,650 £5,000-£2,650 = £2,350

That means that £2,350 can be earned in interest from savings tax free, so the £150 of interest they have earnt from their savings will be tax free.

For more information on Tax on savings interest visit

The Personal Savings Allowance

As well as the starting rate for savings, there is also a Personal Savings Allowance.

Like with the starting rate for savings, the Personal Savings Allowance lets you earn a certain amount of interest from your savings tax free.

Depending on the Income Tax band your income falls under, the Personal Savings Allowance is a different amount:

Basic rate tax payer – £1,000

Higher rate tax payer – £500

Additional rate tax payer – £0

How much tax you’ll pay on savings

The interest you get on your savings is normally not taxed, meaning it is paid ‘gross’. Here are the limits for the amount of interest you can earn tax-free.

Rate of tax Income, such as salary, not from savings Amount of interest on savings that’s tax free
No tax £0 to £11,850 Can earn a maximum of £5,000 in interest from savings tax-free with the starting rate for savings. See the starting rate for savings section, above, for more details.
Basic rate tax payer – low income £11,851 to £16,849 Can earn up to £4,999 in interest tax-free with the starting-rate for savings. Can also earn up to £1,000 of further interest on their savings without having to pay tax with the Personal Savings Allowance.
Basic rate tax payer £16,850 to £46,350 Can earn £1,000 interest on their savings without having to pay tax with the Personal Savings Allowance.
Higher rate tax payer £46,351 to £150,000 Can earn up to £500 worth of interest tax-free with the Personal Savings Allowance.
Additional rate tax payer Over £150,000 No savings interest allowance.

Any interest from savings that is over your Personal Savings Allowance or Starting Rate for Savings is taxed. The amount of tax depends on your income.

The Personal Savings Allowance and Starting-rate for Savings covers interest from

  • bank and building societies
  • savings and credit union accounts
  • open-ended investment companies (OEICs), investment trusts and unit trusts
  • peer-to-peer lending
  • government or company bonds
  • life annuity payments
  • some life insurance contracts.

If you live in Scotland, the tax rates are slightly different. Find out more on our Scotland Income Tax page.

Claiming back tax

If you think you’ve overpaid tax on your savings, you can claim it back by filling in form R40 on GOV.UK.

Tax-free savings

Some savings products pay interest that is always tax-free, regardless of how much you earn or other savings interest you are receiving - although most savers no longer need to save into an ISA to earn interest tax free, thanks to the introduction of the Personal Savings Allowance.

Your ISA allowance for the 2018/19 tax year is £20,000, meaning you can still save tax free even if you are an additional rate taxpayer.

Tax-free savings products include ISAs and some NS&I products, such as savings certificates and Children’s Bonds (Children’s Bonds are no longer available, but if you already have them you have options. Find out more on our Children’s Bonds page).

Share-based investments

If you own shares, you may get income in the form of dividends.

Dividends are a portion of the profits made by the company that issued the shares you’ve invested in.

If you have an investment fund that is invested in shares, then you may get distributions that are taxed in the same way as dividends.

For the tax year 2018-19 the tax-free Dividend Allowance is £2,000 a year.

Dividends above this level are taxed at:

  • 7.5% (for basic rate taxpayers)
  • 32.5% (for higher rate taxpayers)
  • 38.1% (for additional rate taxpayers).

Any dividends received within a pension or ISA are unaffected and remain tax-free.

Basic rate payers who receive dividends of more than £2,000 need to complete a self-assessment return.


  1. If you receive dividend income of up to £2,000 outside an ISA, you’ll pay no tax on your dividends, even if you’re a higher or additional rate taxpayer.
  2. If your total income is less than £11,850 (the current personal allowance), any income is covered by your personal allowance. You will have no tax to pay as your dividend allowance of £2,000 is untouched.
  3. If your dividend income is received within an ISA, it will remain tax-free and the dividend allowance will not impact any income you receive.

Tax-efficient investments

Generally speaking, stocks and shares ISAs are useful if you pay Income Tax at a higher or additional rate. However, it’s a good idea to weigh up the pros and cons if extra charges are involved.

Where the investments in your stocks and shares ISA do not pay dividends, but instead pay interest (for example, government and corporate bonds), the interest paid remains tax-free.

Life-insurance investments

One way to invest in investment funds is through a life insurance policy.

The insurance company owns the funds and has to pay tax on income and gains they make.

When the proceeds are paid out to you, they always count as income and you are treated as if tax at the basic rate of 20% has already been deducted.

This tax can’t be reclaimed. If you don’t pay tax because you earn less than £11,850, or you pay the basic rate of tax, there is no more tax for you to pay.

Higher-rate and additional-rate taxpayers have to pay extra tax of 20% and 25% unless the insurance policy is ‘qualifying’, in which case there is no extra tax.

Policies issued by a UK-based Life office where you pay regular premiums for 10 years or more are likely to be qualifying; policies where you pay a single lump sum premium are not.

Other options

It may make sense to consider other types of investment fund, such as unit trusts and open-ended investment companies (OEICS), rather than life-insurance investments.

With these funds, part of the proceeds you receive count as income (and are typically taxed as described above in the section on share-based investments), while part may come from gains due to rising share prices.

In particular, because you have a capital gains tax-free allowance limit (currently £11,700 for the tax year 2018/19), you could find you might pay less tax if you hold these types of investment fund rather than some life-insurance investments.

This article is provided by the Money Advice Service.