What is the minimum amount of savings I can have in UK sterling accounts before I have to pay tax on them?

16 June 2021

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Question by Gabriella

Hello I don't understand what is the minimum amount of savings I can have in UK sterling accounts before I have to pay tax on them and I'm not talking about the interest earned but the actual sums of money initially in the accounts? Also if I don't pay income tax because my income is lower than £12,500, why wouldn't it be better to put a sum of money into a fixed savings account rather than an ISA, since I don't pay tax anyway. Or would it be better to put say £20,000 into a fixed savings account with a decent interest rate rather than an ISA in my case?


Answered by Helena Wardle

Hello Gabriella

It’s a great question, and there are a few things to consider.

The amount of interest your savings can generate before you pay tax is determined by your taxable income and the interest rate you are receiving. So it is more about what else you earn in other taxable income, what rate of interest you receive on your savings and what you save your money in. So it also matters where you invest your savings. For example, we all get an overall limit of £20,000 each year as an allowance to save into ISA’s, one of which is cash ISA’s. ISA’s are tax-free savings accounts, and you can split this allowance across the 4 different types of ISA’s as long as you keep to the overall limit of £20,000 (Cash ISA’s, Stocks and Shares ISA’s, Lifetime ISA’s and Innovative Finance ISA’s). In addition, you can save up to £50,000 in premium bonds, which is tax-free.  

If you earn less than £12,570 in a year, you will rarely pay tax on the interest generated from your savings in the current climate. This is because you get to earn an extra £5,000 in interest through what is called the savings band. Your savings providers will usually be able to help you with an interest statement each year, but you may have to ask them for this.

If you earn between £17,571 and £50,270 each year, you can only earn £1,000 each year in interest. If you are in the fortunate position to be classed as a Higher Rate Tax payer and earn more than £50,271, but less than £150,000 each year, you can earn up to £500 interest each year.

Please remember that if you save in a product that is not an ISA, the provider will pay you interest without deducting tax, and you are responsible for declaring this to HMRC.

You should also consider what degree of accessibility you would like to have to your savings. ISA providers often offer not only immediate access products but fixed-rate options too. If you are happy to tie money up for a fixed term, you might be able to generate a higher return. However, you may well be penalised for accessing your money before the end date.

Whilst you may be a non-taxpayer now, If you are likely to pay income tax in the future, ISA products could be even more valuable to you in years to come. Once you have money invested in an ISA, it’s tax-free for as long as you keep the money invested.  ISA’s are transferable between providers. You can, therefore, look for the best returns while keeping the tax-efficient status of the accounts.

I hope this helps

Answered by

Helena Wardle

Chartered Financial Planner

I am passionate about helping people get more clarity, confidence and reassurance with their money matters. I feel it is important to understand our client’s stories and to help connect their money with what matters to them.