Savings Interest Tax in 2025: Personal Savings Allowance Explained & How to Pay Less Tax 💷🏦| Accountants In Essex

Did you know that even the interest on your savings could push you into paying more tax? With interest rates still relatively high, more people than ever are exceeding their Personal Savings Allowance (PSA) and being taxed on their savings income.

As experienced accountants in Essex, here’s everything you need to know about tax on savings interest in 2025, how the PSA works, and what to do if you owe tax.

✅ What Is the Personal Savings Allowance in 2025?

The Personal Savings Allowance lets you earn a certain amount of interest tax-free, depending on your income tax band:

• Basic rate taxpayers (20%) – £1,000 allowance

• Higher rate taxpayers (40%) – £500 allowance

• Additional rate taxpayers (45%) – £0 allowance

So if you’re a basic rate taxpayer, you can earn up to £1,000 interest tax-free. Anything above this is taxable.

💡 Why Are More People Paying Tax on Savings Interest?

Higher interest rates mean even modest savings accounts are generating hundreds of pounds in interest. Combined with frozen income tax thresholds, millions are breaching the allowance.

Example: If you have £20,000 in savings at 4.5%, that’s £900 in interest — almost hitting the PSA. If you have £50,000 saved, you’ll exceed it easily.

🧾 Do You Need to Do a Tax Return?

HMRC normally collects tax on savings through your tax code. But you must file a Self Assessment tax return if:

✅ Your untaxed interest is over £10,000

✅ You already complete Self Assessment for other income (e.g., rental, dividends)

✅ You want to reclaim overpaid tax

📊 How Is Tax on Savings Calculated?

Interest over your PSA is taxed at:

• 20% for basic rate taxpayers

• 40% for higher rate taxpayers

• 45% for additional rate taxpayers

You might also benefit from the starting savings rate (0%), which applies if your total income is below £17,570.

✅ How to Pay Less Tax on Savings Interest

✔️ Use ISAs – Interest in ISAs is always tax-free

✔️ Spread savings across partners – Each person gets their own PSA

✔️ Make pension contributions – Reduce taxable income and increase PSA eligibility

✔️ Plan withdrawals carefully to stay under thresholds

🏦 Why Work With Accountants in Essex?

We help individuals and businesses manage all aspects of tax — from Self Assessment returns to tax planning and claiming refunds. If you’re unsure whether you owe tax on savings, or if HMRC has your code wrong, we’ll make sure you’re compliant without paying more than you should.

📩 Contact us today for personalised advice from trusted accountants in Essex.

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