When completing self-assessment tax returns, I often get asked by clients if they really need to find all their bank interest payments for me, especially when it’s only a few pence a month.

But it’s only pence!

You may not know that the banks and building societies already give details of interest payments to HMRC. It’s a complicated and manual process to match it to your tax account, but once HMRC do they are expecting you to tell them about the bank interest payments. If you don’t, you have made an error or been dishonest on your tax return and it could flag you for investigation. Put yourself if their shoes… if you can get it wrong about a few pounds of interest, what else could you not be telling them?

So what’s the tax implication?

Most people get some kind of allowance that makes their interest on earnings tax free:

  • First you have a tax free Personal Allowance of £12,570* so if your income from other sources plus your interest from savings falls under this you won’t pay any tax.
  • Most people also get some kind of savings allowance. If your income from other sources is below your personal allowance, you’re entitled to the Starting Rate for Savings which allows you up to £5,000* of interest tax-free. This rate tapers off for every £1 you earn over the personal allowance. Once your other income is £17,570* or more, you’re not eligible for the starting rate for savings.
  • In addition, there’s a Personal Savings Allowance of £1000* for all basic rate taxpayers or £500* for Higher Rate Tax payers. This means you can earn up to your allowance in interest without paying any tax.

Only Additional Rate taxpayers (those with over £150,000* of income) are not eligible for a savings allowance.

As well as the allowances, some accounts are tax free such as Individual Savings Accounts (ISAs), some National Savings and Investments (NS&i) and the government Help To Save scheme to name a few. You don’t declare this interest on your self-assessment tax return.

You might even get tax back!

The interest on some accounts is taxed at source, meaning you have already paid tax on the interest you received. If this is the case and you were entitled to tax-free savings under one of the rates or allowances, you can reclaim tax paid on your savings interest. You will get the tax back as part of the tax calculation and if HMRC end up owing you, you can get a rebate.

How do I find out how much I received? Do I have to plough through every bank statement?

Not necessarily, most banks and building societies provide an Annual Interest Summary. This could be:

  • Sent as a page of your bank statement at year end,
  • can often be downloaded in your banking app or
  • can be available to download via on online banking.

If you have a joint account, interest will be split equally between the account holders

Anything else I need to know?

We have mainly talked about bank and building society accounts but interest on the following is also taxable:

  • savings and credit union accounts
  • unit trusts, investment trusts and open-ended investment companies
  • peer-to-peer lending
  • trust funds
  • payment protection insurance (PPI)
  • government or company bonds
  • life annuity payments
  • some life insurance contracts

* Though figures were correct at the time of publishing these rates change each tax year. Please see the latest rates on the gov.uk website.
Reference: Tax on savings interest (GOV.UK)

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