Do I need to pay tax on bank interest that I have received?

Bank interest paid by UK banks is generally paid to you gross, without deduction of income tax.

This does not mean these payments will fully escape tax, but there are some generous allowances which means significant numbers of taxpayers will have no additional tax to settle when completing their tax returns, if they are required to complete a return.

Most taxpayers will be entitled to a personal allowance of £12,570 in 2021/22. This is progressively withdrawn for individuals earning more than £100,000. Dependent on your other sources of income, you may be able to use some of your personal allowance to cover your bank interest.

If your personal allowance has already been used against other sources of income, there are some additional allowances which may mean you have no additional tax to pay on your bank interest.

For example, a savings nil rate applies to taxable interest income which is often called the Personal Savings Allowance (PSA). Where your bank interest is covered by your PSA, you pay tax at the rate of 0% on the interest.

The amount of PSA you are entitled to depends on the level of your taxable income. A good rule of thumb is that if you don’t pay higher rate income tax, the amount of the allowance is £1,000. If you pay tax at the higher rate, the amount of the allowance is £500. If you pay tax at the additional rate, the allowance is reduced to nil. In addition, some tax payers with lower incomes will be able to take advantage of the starting rate band of interest which could again lead to greater amounts of bank interest being taxed at a 0% rate.

If you want more tailored advice, please get in touch with us today via01942 938 212 or complete our contact form here and we will be happy to talk you through the most tax efficient route.

Date published 28 Feb 2020 | Last updated 26 May 2021

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.