Following the end of each tax year, your bank or building society will let HMRC know how much interest you have received on your savings. This allows HMRC to work out whether any tax is due. If you go over your Personal Savings Allowance and you’re employed or receive a pension, the extra tax will usually be collected automatically. HMRC do this by adjusting your tax code accordingly.
If you currently complete a self-assessment tax return, you should report any interest you earn on there. If you’re not employed, don’t complete a self-assessment and don’t receive a pension, HMRC should contact you to tell you if you need to pay any tax.
Personal Savings Allowance for a joint account
When it comes to the Personal Savings Allowance for a joint account, interest is split equally between the account holders. So, what are the tax implications of joint accounts?
Suppose one of you is a basic rate taxpayer, and your partner pays at a higher rate. In that case, half the interest will count towards your basic rate Personal Savings Allowance (£1,000), and half towards your partner’s higher rate Personal Savings Allowance of £500.
Interest you earn from saving can push you into higher tax bands
Interest on your bank or building society savings is classed as income for UK income tax purposes – which means the amount you earn can affect your Income Tax band. For example, if you’re usually a basic rate taxpayer and you earn £1,000 in interest from your savings during one tax year, that could push you into the higher-rate tax band, meaning that your £1,000 Personal Savings Allowance reduced to £500.
Why save in an ISA?
Investing in an ISA remains a great way to save. While your Personal Savings Allowance can allow you to earn interest each year up to a certain limit tax-free, all interest earned on savings held in an ISA is tax-free for as long as you keep them there* – and you can grow your tax-free savings pot year after year.
Read more about our Cash ISA