Guidance on the 10 per cent starting rate for 'savings income'
Most people have income which is made up of a mixture of ‘earnings’ (things like wages and pensions) and ‘savings income’ (interest from bank and building society accounts).
Nearly everyone is entitled to a personal allowance, which allows you a certain amount of income that does not get taxed. If your total taxable income (earnings + savings) is more than your personal allowance, you will have to pay tax on the income that is above your allowance. The amount of your personal allowance increases with age and you can find out what your allowance is.
See an example of how the personal allowance works.
The rate of tax will depend on the type of income you receive (earnings or savings) and how much of each type of income you receive.
Most taxable income (up to the basic rate limit of £36,000) is taxed at the basic rate of 20 per cent , but there is a special 10 per cent starting rate for ‘savings income’ (that is bank and building society interest) that you may be entitled to. The rate at which your saving income is taxable will depend on how much earnings you receive. If your earnings are less than your personal allowance plus £2320, then some or all of your savings income will be taxable at 10 per cent.
If you have a mixture of earnings and savings income you have to work out if you are entitled to have any of the savings income taxed at 10 per cent . Any savings income above £2,320 will be taxed at 20 per cent. The examples in this page show how the 10 per cent rate kicks in. If you need help or are unsure if the 10 per cent rate will apply to your savings income then contact your tax office.
If your only taxable income is savings income, you are entitled to have the first £2,320 of income above your personal allowance taxed at 10 per cent . Any savings income above £2,320 will be taxed at 20 per cent.
Banks and building societies will automatically deduct tax at a rate of 20 per cent from the interest you earn. So if you are entitled to have any of your savings income taxed at 10 per cent you will be able to claim some tax back from HM Revenue & Customs.
See more information about claiming your tax back.
The personal allowance is deducted from earnings first as this usually gives the greatest reduction in a tax bill.
See an example where a saver has no earned income.
See an example where a saver has earnings of less than their personal allowance.
Example 1
Emily has a total income of £10,000 and, because she is under 65, her personal allowance is £5,435. Emily’s taxable income is £4,565. The calculation below shows how this is worked out.
Total income - £10,000
Less personal allowance - £5,435
Taxable income - £4,565
Example 2
Hector has no earnings at all, but he does have savings income of £10,000. Hector’s personal allowance is £5,435 because he is under 65. Hector’s taxable income is £4,565. The calculation below shows how this is worked out.
Total income - £10,000
Less personal allowance - £5,435
Taxable income - £4,565
The first £2320 of taxable income is taxed at the special starting rate for savings of 10 per cent and the rest is taxed at 20 per cent . The calculation below shows how this is worked out
£2320 x 10 per cent = £232
£2245 x 20 per cent = £449
Total Tax = £681
Hector’s bank will have taken tax off all of his interest at 20 per cent so they will have taken off £2,000 (£10,000 x 20 per cent = £2000). But Hector is only due to pay £681 tax. This means he can claim a repayment of tax from HM Revenue & Customs of £1319 (£2,000 - £681)
Example 3
Lynn has earnings income of £4,000 and savings income of £6,000. Lynn’s personal allowance is £5,435 because she is under 65. Lynn’s taxable income is £4,565. The calculation below shows how this is worked out.
Total income - £10,000
Less personal allowance - £5,435
Taxable income - £4,565
Lynn’s personal allowance is firstly used against her earnings of
£4,000 so none of her earnings are taxable. All of Lynn’s taxable
income is savings income.
The first £2,320 of taxable income is taxed at the special starting rate for savings of 10 per cent and the rest is taxed at 20 per cent . The calculation below shows how this is worked out.
£2320 x 10 per cent = £232
£2245 x 20 per cent = £449
Total Tax = £681
Lynn’s bank will have taken tax off all of her interest at 20 per cent so they will have taken off £1,200 (£6,000 x 20 per cent = £1200). But Lynn is only due to pay £681 tax. This means she can claim a repayment of tax from HM Revenue & Customs of £519 (£1200 - £681).
Example 4
Deryn has earnings £20,000 and savings income of £5,000. Deryn’s personal allowance is £5,435 because she is under 65. Deryn’s taxable income is £19,565. The calculation below shows how this is worked out.
Total income - £25,000
Less personal allowance - £5,435
Taxable income - £19,565
After taking the personal allowance off her earnings, the amount of earnings that is taxable is more than £2,320 (£20,000 - £5,435 = £14,565) so none of her savings income is taxed at 10 per cent . All of her income is taxed at 20 per cent , and she cannot claim any tax back from HM Revenue & Customs.
Example 5
Fernando has earnings of £6,000 from employment and savings income of £4,000. Fernando’s personal allowance is £5,435 because he is under 65. Fernando’s taxable income is £4,565. The calculation below shows how this is worked out.
Total income - £10,000
Less personal allowance - £5,435
Taxable income - £4,565
Fernando’s personal allowance is all used against his earnings of £6,000 so only £565 (£6,000 - £5,435) is taxable. The rest of the starting rate limit (£2320 – £565 = £1755) can be used against savings income. The calculation below shows how this is worked out. Fernando’s earnings must be taxed before his savings.
Earnings £565 x 20 per cent = £113
Savings £1755 x 10 per cent = £175.50
Savings £2,245 (£4000 – 1755) x 20 per cent = £449
Total tax = £737.50
Fernando’s employer has deducted £113 income tax from his earnings through Pay As You Earn. Fernando’s bank will have taken tax off all of his interest at 20 per cent so they will have taken off £800 (£4,000 x 20 per cent = £800). So Fernando has paid a total of £913 tax at source (£113 + £800). But Fernando is only due to pay £737.50 tax. This means he can claim a repayment of tax from HM Revenue & Customs of £175.50 (£913 - £737.50).
