Muras Matters: Rising Interest Rates And Tax On Savings


With interest rates having risen significantly over the last 18 months, and tax thresholds being frozen, more taxpayers are likely to find themselves being pushed into paying income tax on their savings.

Individuals pay tax on interest they earn on cash savings that exceed their personal savings allowance. It is estimated that for the current 2023-24 tax year over 2.7 million individuals will pay tax on their cash savings, up by a million in a single year. In 2020-21 only 800,000 individuals paid tax on their savings.

Many individuals will not be aware that they will have tax to pay on their savings until HM Revenue & Customs (‘HMRC’) sends them a letter informing them that their tax code has changed, meaning additional tax will be deducted from their PAYE earnings.


Individuals pay income tax on interest that exceeds the personal savings allowance, which currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers are not entitled to any tax free allowance and therefore pay income tax on all interest they receive. These personal savings allowance thresholds have remained at the same levels since 2016.

Tax on interest earned on savings is either paid through self-assessment or deducted from income through a tax code adjustment for those paid via the PAYE system. HMRC will calculate any tax due based on information sent to them by banks and building societies and adjust an individual’s tax code accordingly.

However, there are ways to mitigate potential tax bills on savings as set out below. Please note, we cannot comment on the suitability of any of these investments for an individual and advice should be sought from an independent financial advisor before making any investment decisions.

  • Cash ISAs – Interest earned from an ISA is tax-free and a maximum of £20,000 per annum can be saved.
  • Using your partner’s allowance – For some households it may be beneficial to split cash savings between a couple. If a taxpayer’s partner has an unused personal savings allowance cash could be held in their name instead. Equally if they have an unused ISA allowance cash could be put into an ISA in their name.
  • Premium bonds – Premium bonds from NS&I offer a secure way to hold cash and whilst there is not a set interest rate, they do offer monthly prizes of £25 to £1 million which are tax-free. The down side is that there is no guaranteed return since you may never win a prize.
  • Pension contributions – If an individual has just tipped over into the next tax bracket and seen their personal savings allowance halved or reduced to nil, then they may wish to consider using pension contributions to bring them back down into the lower income tax bracket. Pension contributions have the effect of extending a taxpayers basic rate band by the gross value of the contribution and can help prevent tipping into a higher tax band. In addition with the annual allowance on pension contributions currently at £60,000, individuals with retirement in mind might consider setting aside larger sums with a view to benefitting from tax free growth, as well as the up-front tax relief the contributions may provide.
  • Investing – Individuals can invest up to £20,000 a year tax-free in a stocks and shares ISA. Money can also be put into a cash ISA in the same tax year, but the combined total must not exceed more than the £20,000 limit.

If you would like further information on investments or pension contributions please contact Mark Underwood of Muras Baker Jones Financial Services Limited.

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