Use our tax on savings interest calculator to see how much you will pay

Savers are beginning to grow accustomed to healthy interest rates, but better deals bring with them the threat of tax.

Millions who’ve never previously paid tax on their savings income have been dragged into doing so. HM Revenue and Customs figures obtained by AJ Bell show 2.7 million savers – including 1.4 million basic-rate taxpayers – likely paid tax on their nest egg savings growth for 2023-24.

However, there are simple steps you can take to avoid paying more tax than you should on your nest egg.

Firstly, use our calculator below to find out how much tax you can expect to pay and whether you might be better off switching to a tax-free account.

Do I need to pay tax on my savings?

Interest earned on cash held in a savings account is taxable, but most people can offset this with the personal savings allowance. This is currently £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. Additional-rate taxpayers get no allowance, and therefore pay tax on all savings interest.

Those who earn £18,570 or less may also be able to benefit from the starting rate for savings; this allows lower earners up to £5,000 tax-free savings interest – in addition to the personal savings allowance. The £5,000 reduces by £1 for every £1 earned over £12,570 (the personal allowance).

Tax on savings is either paid through self-assessment, or deducted from income via a PAYE tax code adjustment.

How much can I save before being taxed?

The top easy access account, offered by Cynergy Bank, pays 5.1pc, while the highest-paying one-year bond is at 5.17pc, from Hampshire Trust Bank, according to the analyst Moneyfacts. 

If you are a higher-rate taxpayer with more than £9,800 in the top easy access savings account, you could be landed with a tax bill, as the interest you’ll earn could exceed £500 over the course of a year.

If you have £100,000 in the account, you will earn £5,100 in interest and pay £1,840 in tax. This will reduce your returns to £3,260 after tax. 

But you could prevent the taxman from taking such a sizeable chunk by using your £20,000 Isa allowance.

If you move £20,000 to the top easy access Isa, which pays 5.07pc and is from Kent Reliance, you will earn £1,014 in interest tax-free. 

If you leave the rest of your cash savings (£80,000 in this scenario) in the top easy access account, you would get £2,648 after tax. Your total interest would be £4,080 a year but you would have to subtract a tax bill of £1,432.

In total, your returns from both accounts, with tax taken into account, would be £3,662 for the year. 

Another popular way to save on tax would be to put some of your savings into Premium Bonds, because the prizes are tax-free. The catch is that returns vary and are not guaranteed. If you put the maximum allowance of £50,000 in Premium Bonds and earn the prize rate of 4.4pc, the returns would be £2,200 a year. 

Combined with the Isa trick – which, with this amount would see you save £20,000 in the top Isa and the remaining amount in the top easy access account (£30,000) – you’d get potential returns of £4,332 a year after paying tax.

The downside is that you might not get the advertised rate on Premium Bonds. However, each £1 in Premium Bonds enters you into a monthly prize draw, so the more you have in Premium Bonds, the higher your returns are likely to be. Typically, it is those with the maximum amount in Premium Bonds who earn the most interest. 

If you’re keen to avoid paying any tax at all on your savings, there are lots of things you can do. Read our guide on how to slash your savings income tax bill.