Finance > Tax (employee Focus)
Ways to Earn Interest Tax-Free
There are multiple ways of earning interest tax-free. This article covers the following:
While most of us won’t pay tax on our savings due to the Personal Savings Allowance, you can put your savings into an ISA to ensure they remain tax-free forever!
Personal Allowance
This is the amount of income you can earn before paying any tax. The standard personal allowance for 2022/23 is £12,570.
You can use your personal allowance to earn interest tax-free if you have not used it up on your salary, pension or other income!
Restricted personal allowance: when you earn over £100,000, your personal allowance is reduced by £1 for every £2 you earn over £100,000. Once you’re earning £125,140 or more, you will get no personal allowance.
Personal Savings Allowance
Depending on the Tax Band that you’re in, you may also get a Personal Savings Allowance (PSA). Combine all of your income (including interest income) and work out your PSA with the table below.
| Band | Income | Tax Rate | PSA |
|---|---|---|---|
|
Basic Rate |
£12,571 – £50,270 |
20% |
£1,000 |
|
Higher Rate |
£50,271 – £150,000 |
40% |
£500 |
|
Additional Rate |
Over £150,000 |
45% |
£0 |
Given an interest rate of 1%, the current rate stated by the Bank of England, this means a basic rate taxpayer would need £100,000 of savings to utilise their £1,000 PSA. This is why most of us will not pay tax on the interest we earn on our savings.
Individual Savings Account (ISA)
An Individual Savings Account (ISA) is an account in which you can save or invest a certain amount without paying tax on your returns.
Each tax year (6 April to 5 April), there’s a maximum amount of money you can put into your ISAs, this is called the ISA allowance. For the 2022/23 tax year, the ISA allowance is £20,000.
So if you had a cash ISA, where you earn interest on the amount held within the account, even if you contribute the full £20,000 per year, all interest is tax-free.
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