I have recently retired, and my only income now comes from the interest paid on my savings. If I go over the personal savings allowance of £1,000, will I have to start paying income tax?
Back in April 2016, the Personal Savings Allowance was introduced, which allows savers to earn tax-free interest each year on their savings.
Annually, this means you can earn up to £1,000 interest tax-free if you’re a basic-rate taxpayer or £500 if you’re a higher-rate taxpayer. Additional-rate taxpayers don’t receive a personal savings allowance.
In addition to the personal savings allowance, you are likely to be eligible for a further tax break. If your total taxable income is under the personal income tax allowance of £11,850 (note that income tax bands differ in Scotland), then you also get a ‘starting rate for savings’ allowance of £5,000. That means you can earn up to £5,000 in interest without paying tax on it.
These allowances sit on top of each other; first the personal allowance (£11,850 for 2018/19), then the £5,000 starting savings rate at 0%, and finally, the personal savings allowance of up to £1,000. If your total taxable savings income is less than £17,850 for 2018/19, you’re unlikely to have to pay any tax.
In the unlikely event that your annual savings income will exceed £17,850, then remember you can use your £20,000 annual Individual Savings Account (Isa) allowance to avoid tax too.