Hidden In Plain Sight

As the tax year draws to a close, it’s worth taking a moment to consider how interest and other forms of savings income are taxed and whether you’re making full use of the allowances available.

For most people, savings income means interest from bank accounts or savings platforms. But the definition is wider than that. It also covers things like:

• Returns from deeply discounted securities

• Income taxed under the accrued income scheme

• Gains from onshore or international bonds

But let’s keep things straightforward for now and focus on interest.

The Two Allowances Worth Knowing

There are two specific allowances, on top of the personal allowance, that can reduce the tax you might otherwise pay on savings income.

1. Personal Savings Allowance (PSA)

This is the more widely known of the two:

• £1,000 of savings income is tax-free if you’re a basic rate taxpayer

• If you’re in the higher rate band, this drops to £500

• And if you fall into the additional rate bracket, the allowance no longer applies

So as your income increases, the tax-free amount you can receive from savings reduces and once you’re into the top income band (currently starting at £125,140), the allowance disappears altogether.

2. Starting Rate for Savings

Less commonly used, but just as useful in the right situation, is the starting rate for savings.

This can give you up to £5,000 of interest taxed at 0%. But whether you qualify and how much you get depends on your other income.

Here’s the key point: this 0% rate is only available to the extent your non-savings income (things like salary or pensions) stays below £17,570. That figure includes the personal allowance of £12,570, and once your earnings go above that, the starting rate band is gradually reduced, £1 less for every £1 over the limit.

So if your income is made up largely of interest or if you're structuring investments in the name of a non-earning or lower-earning spouse there may be a valuable opportunity to make use of this extra tax-free band.

How It Can Add Up

In the right circumstances, you could benefit from:

• £12,570 personal allowance (available to everyone)

• £5,000 starting rate for savings

• £1,000 personal savings allowance

That’s up to £18,570 of income that could be completely tax-free if a good chunk of it comes from interest or other savings sources.

Planning Points

It’s not always easy to control the amount or timing of interest, especially if capital is already tied up in fixed-rate accounts or bonds with set maturity dates. But it’s worth being aware of the thresholds, particularly if you’re thinking about realising a gain from an offshore bond or restructuring your savings.

In some cases, a small change in the timing of a withdrawal or how interest is held could mean more of it falls within a 0% tax band.

Interest income isn’t always fully taxable and the allowances can add up, especially when planned alongside your broader income picture.