Saving money doesn’t have to be taxing

With so many types of taxes and different rates for each one, it’s easy to get confused by the various thresholds and percentages. Yet it’s a good idea to understand the basics so you don’t end up paying more tax than is necessary.

The rise in the cost of living means making every penny count is more important than ever. The good news is that there are some simple things that you can do to organise your money to help it go a bit further.

A good starting point is to work out what type of taxpayer you are, which is based on your income for the tax year. For the 2024/25 tax year (which runs from 6 April to 5 April the following year), you won’t pay any tax on income within your Personal Allowance, which is generally the first £12,570 of your annual income.

Here are the income tax bands if your annual income exceeds £12,570:

• Basic rate, £12,571 to £50,270, 20%
• Higher rate, £50,271 to £125,140, 40%
• Additional rate, over £125,140, 45%

In fact, because the £12,570 Personal Allowance goes down by £1 for every £2 of taxable income above £100,000, you effectively pay tax at a rate of 60% on income between £100,000 and £125,140.

If you’re not sure where you stand, then you can check things on the government website calculator (Opens in new window)

Tax on your savings interest

It’s wise to set aside some money for a rainy day, and any interest earned from a savings account can help it grow. However, you might find that you’re liable to pay income tax on the interest you earn. It’s important to review where you stand.

The good news is that most people can earn some interest from their savings without paying tax. Your allowances for earning interest before you have to pay tax on it may include:

• your Personal Allowance
• starting rate (Opens in new window) for savings
• Personal Savings Allowance

You get these allowances each tax year. How much you get depends on your income. You may be able to use your Personal Allowance to earn interest tax-free if you haven't used it up on your wages, pension or other income.

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which income tax band you’re in. This is your Personal Savings Allowance. To work out your tax band, add all the interest you’ve received to your other income. You can then see if you qualify for the Personal Savings Allowance and if so, how much:

Income tax band and Personal Savings Allowance

• Basic rate (20%) taxpayers can earn £1,000 in savings interest each year with no tax
• Higher rate (40%) taxpayers can earn £500 in savings interest each year with no tax
• Additional rate (45%) taxpayers do not get an allowance

So, if you’re a basic rate taxpayer with £20,000 in a savings account that's paying 5% annual interest then you’ll be able to earn £1,000 in interest before you pay tax on this amount. If you have more than £20,000 or if the savings rate is higher than 5% then you’ll likely end up paying some income tax on that interest income.

You’ll pay tax on any interest over your allowances at your marginal rate of income tax. If you’re employed or get a pension, HMRC may change your tax code, so you'll pay the tax automatically. To decide your tax code, HMRC may estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

Boost your savings with an ISA

One way to boost your savings is by putting them in a cash or stocks and shares ISA. You won’t pay any tax on any interest or investment growth, and you can put in up to £20,000 a year. If you can, get into a regular saving or investment habit by putting away a bit at a time.

If you’re thinking about investing for the first time then ISAs can be a great, tax-efficient way to do so. With both cash and investment ISAs, keeping on top of your earnings, savings and investments and the tax thresholds applicable, you could give your money a much-needed boost.

Introducing Nutmeg

Introducing Nutmeg, the digital wealth manager that's part of the Chase family. You can now open an account with Nutmeg (Opens in new window) and keep an eye on your investments through the Chase app – so you can see everything in one place.

Nutmeg is authorised and regulated by the FCA in relation to certain investment services and restricted advice only. Chase is a trading name of J.P. Morgan Europe Limited. Nutmeg and J.P. Morgan Europe Limited are J.P. Morgan companies. Investments provided by Nutmeg and not guaranteed by Chase. Chase current account required. Before applying, you should consider if a Nutmeg account and its features are suitable for you and your investment needs.

Recommended reading

• ISAs can offer a smart way to save or invest
• A weekend to change your finances
• Six smart reasons to keep saving

Disclaimer: As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. A stocks and shares ISA may not be right for everyone. Nutmeg does not offer cash ISAs. If you are unsure if an ISA is the right choice for you, please seek financial advice. Tax rules depend on individual status and may change. For personalised advice tailored to your specific situation please consult with a qualified tax adviser or financial planner.