More of us are paying tax on savings – are you?

28 March 2024

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Cash ISAs and the Personal Savings Allowance can help reduce the tax people pay on the interest earned from their savings. But our latest research has found awareness about the tax we might have to pay on savings is low – a majority (71%) of the consumers we surveyed said they were not aware that interest on savings can be taxed, while just 17% said they “knew a lot about” the Personal Savings Allowance…

The number of savers who have to pay tax on the interest they earn on their savings has risen over the past two years due to the rapid rises in interest rates in the UK.

HMRC, the tax authority, said last year that an extra 1 million taxpayers would pay tax on savings interest in 2023.

With savings rates at just above 0% a few years ago, savers could have £60,000, £70,000 or even more in accounts before needing to pay tax on the interest they earn. Now however, with many savings rates paying more than 4%, tax on savings may start with significantly smaller pots.

The good news is that there are simple ways to reduce the tax on our savings, such as saving in cash ISAs. Making sure we all understand what our Personal Savings Allowance (PSA) is can also be helpful.

The not-so-good news is that many people, it appears, are not aware that savings interest can be taxed – and might not, therefore, make the best of tax-savings options.

A surprising lack of awareness about tax on savings interest

In February this year, we conducted research among 2,000 UK savers to find out how aware they were that savings interest can be taxed. Our study had some surprising results.

For example, most people (71% of the people that took part in our study) said they did not really know that interest on savings can be taxed. Of these people, almost half (47%) said they had heard about the PSA but did not know much about it.

Likewise, just 17% said they “knew a lot about” the PSA and two in five (40%) admitted they had not heard about the PSA before filling our questionnaire.

As a quick reminder, the PSA is the amount of interest an individual can earn on their savings before they need to begin paying tax. It is based on the amount of income tax we pay.

People who are basic rate taxpayers – i.e., those who pay 20% income tax – can earn £1,000 a year in savings interest before paying tax on their savings.

For more information, please read our previous in-depth article.

Is it time for you to think about a cash ISA?

One easy way to limit the tax you pay on savings is by saving in a cash ISA.

Unlike a traditional savings account, interest earned on any savings you put into cash ISAs is Tax free – no matter how much interest you earn. At a time when interest rates remain high, cash ISAs have become an even more important option for many of us looking to optimise our savings.

If you’re already paying tax on interest in your regular savings account, or if you’re near this limit, you could consider a cash ISA.

Prioritising cash ISAs can make sense

Our study among 2,000 savers found that some 38% said they own a cash ISA, which compares to 57% who said they have an easy access savings account, and 21% who have a fixed term savings account.

When it comes to adding new money, just under a quarter (24%) said that cash ISAs take priority when adding in new money, 37% said that they prioritise easy access savings accounts. While this may well make perfect sense, particularly if ISA limits have been reached, it is important to consider maximising ISA allowances as best you can to get the most out of your savings.

Even if you don’t currently have to pay tax on your savings – i.e., you don’t exceed your PSA – by saving into a cash ISA now, you can help protect your savings from future tax.

Remember that the ISA allowance means you can only pay a limited amount into an ISA per year, so helping to future-proof your savings in an ISA now might be beneficial later.

The ISA deadline for the 2023/2024 tax year is fast approaching, so now is a good time to think how best to optimise your cash savings. If you don’t use your allowance by the end of the tax year you will lose it.

Learn more about maximising your ISA allowance.

Key things to remember:

Cash ISAs can help to protect the interest you earn on your savings from UK income tax.
Your ISA savings interest only remains Tax-free while it’s still ‘wrapped’ in an ISA account.
The ISA allowance is the annual limit you can save in an ISA, and is currently £20,000.
The deadline for this year is fast approaching. You can’t carry over any unused ISA allowance, so if you don’t use it, you lose it.

Tax-free means the interest rate payable where interest is exempt from UK income tax. Your cash ISA savings balance will be eligible for this tax benefit for so long as it is held in a valid cash ISA account.

The tax treatment of ISAs and the applicable Government rules are subject to change. The benefits of your account for tax purposes will depend on your personal financial circumstances.

This research was conducted by Opinium for Marcus by Goldman Sachs with 2,000 UK adults between 30.01.24 and 02.02.24. Research is weighted to a nationally representative criteria.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.