Am I taxed on the higher interest rates I am getting?


Since August 2021, the UK has witnessed a gradual increase in interest rates. This has not only caught the attention of borrowers but has also left savers wondering about the impact on their hard-earned savings.

Here, we explore the implications of rising interest rates on savers, shed light on tax requirements and savings allowances, and discuss the changes to dividend allowances.

When interest rates begin to rise, savers can expect to see higher returns on their savings. Traditional savings accounts, such as fixed-term deposits and regular savings accounts, tend to benefit from these rate hikes.

Back in August 2021, when rates were at their lowest, the best you could hope for was 1.7% per year interest on a 5-year fixed rate bond whereas now (September 2023) rates of 5.75% per year are available. Whilst this is clearly far more attractive it does bring the issue of tax into consideration.

When it comes to tax requirements, savers need to be aware of their individual circumstances. If you earn interest from savings, it is essential to determine whether you fall within the taxable limits set by HMRC.  

In simple terms, in August 2021 £55,000 in a 5-year fixed rate at 1.7% bond would earn £935 in interest, in September 2023 £55,000 at 5.75% would earn £3,162.50 interest.

It's important to note that there are specific tax allowances available for savings income. The Personal Savings Allowance allows basic rate taxpayers to earn up to £1,000 in interest tax-free, while higher rate taxpayers can earn up to £500. Additional rate taxpayers do not receive this allowance. So, in the example above a basic rate taxpayer would have no tax to pay based upon August 2021 rates but would have tax to pay on £2,162.50 of income based on September 2023 rates.


Avoid tax evasion

As former Chancellor of the Exchequer Denis Healey once said, 'the difference between the two [tax evasion and tax avoidance] is the thickness of a prison wall!' Tax avoidance or tax planning involves using legal means to reduce your current or future tax liabilities. Tax evasion means taking illegal measures to avoid paying taxes.

It is a legal requirement to pay any tax on interest above your personal savings allowance.

If your savings income exceeds the tax-free allowances, you need to complete a self-assessment tax return. You will need to provide details of your savings income, including interest earned from bank accounts, building societies, and other savings products. This includes both taxable and non-taxable interest.

The tax rates applied to your savings income will depend on your overall income and tax band. Basic rate taxpayers may be subject to a tax rate of 20% on their savings income, while higher and additional rate taxpayers may face tax rates of 40% and 45% respectively.

By accurately reporting your savings income through self-assessment, you ensure compliance with tax regulations and contribute your fair share of taxes based on your savings earnings. It's always recommended to seek advice from a tax professional or consult HMRC's guidelines for further clarification on self-assessment tax requirements related to savings.

Beyond the Personal Savings Allowance, savers might also want to explore other tax-efficient savings options. One such option is the Individual Savings Account (ISA), which allows individuals to save or invest up to £20,000 per tax year without paying tax on the interest earned. ISAs come in different forms, including Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs. By utilising ISAs effectively, savers can make the most of their savings while minimising their tax liabilities. Other options include Investment Funds where different allowances, such as Capital Gains Tax allowances, can be used to reduce tax.

Changes to dividend allowances

In addition to interest income, some investors might also receive dividends from their investments. Before April 2018 individuals could earn up to £5,000 in dividends tax-free. However, this allowance was reduced to £2,000 in April 2018 and was halved to £1,000 for the 2023/2024 tax year, affecting the tax liability of savers who receive on dividend income.

It is crucial for investors to keep track of these changes to ensure they remain compliant with the latest tax regulations.

Please note, financial planning advice is provided by Armstrong Watson Financial Planning Limited, which is regulated by the Financial Conduct Authority. Tax advice is regulated by the Institute of Chartered Accountants in England and Wales.

For more information and advice please contact 0808 144 5575 or email

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