Millions of savers have enjoyed better returns on their over the past couple of years - but when do you start to pay on the interest you've made?

It’s estimated over 2.7million individuals will pay tax on interest in the 2023/24 tax year. This is due to a combination of better savings rates, following Bank of England hikes, and frozen tax thresholds. When you're dragged into a higher tax bracket, it affects how much you can earn in interest tax-free.

Basic-rate (20%) taxpayers can earn £1,000 in savings interest every tax year before you having to pay tax, while higher-rate (40%) taxpayers can only earn £500 in savings interest. It's worth noting that you pay tax on the interest earned above these amounts - not the entire amount you've earned from your savings.

So if you're a basic-rate taxpayer and you earned £1,500 in interest from savings, you would pay 20% tax on £500, as the first £1,000 you made is tax-free. If you're an additional-rate (45%) taxpayer, then you cannot earn any tax-free interest on your savings - so everything you earn is subject to tax.

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If you have a low income, you can earn more in savings interest before you start to pay tax. There is a £5,000 starting rate which applies if you earn below the personal allowance of £12,570. When you start to earn above this amount, you lose £1 of your £5,000 starting rate for savings for each £1 you earn above the personal allowance.

This means once you start to earn above £17,570, your £5,000 starting rate for savings is effectively wiped out. If you're worried about your savings being subject to tax, the spoke to Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, about how to protect your money - and when you need to act.

She said: "The point at which a nest egg is liable for tax depends on the interest rate applied to the account – and also sometimes on how the tax is applied (monthly or annually) - so savers with more attractive savings rates might find they become liable to a tax payment at a much lower level of savings than they had anticipated. And many savers don’t even realise they could be liable for tax at all."

Bestinvest has crunched the numbers using the effective interest rate – the actual interest rate paid, according to the Bank of England – on new fixed savings accounts. This fell to 4.31% in October 2024. Alice explained: "Higher rate taxpayers can hold up to around £11,600 in a savings account with a rate of 4.31% before they use up their £500 personal savings allowance and find themselves charged tax on the interest they earn.

"For a basic-rate taxpayer today, there is more wiggle room. They can save just under up to £23,200 in an account with an interest rate of 4.31% before they breach their £1,000 allowance and tax charges get applied to their interest payments."

Anyone worried about paying tax on their savings should hunt out more tax efficient options, Alice said, such as an Individual Savings Account (ISA) which allows savers to put away up to £20,000 each year without paying tax on the interest made.

She said: "The £20,000 applies across all types of ISA, so a savvy saver could store a portion of their savings in the highest-interest Cash ISA they can find and deposit the rest in a Stocks & Shares ISA to take advantage of longer-term investment returns." If you have Premium Bonds, any money you win is also free from tax - but the disadvantage is, how much you could win is all down to chance.

Other ways to protect your savings from tax include using salary sacrifice, which is where you agree to reduce part of your salary in exchange for non-cash benefits, for example, contributions into your pension pot. This results in lower Income Tax and National Insurance contributions, which can actually boost your take-home pay.

Alice said: "Those earning just above the £50,270 earnings threshold, for example, where the higher 40% tax rate kicks in, could dip under it by using salary sacrifice. In turn, they would not only pay less tax on their income but also give their pension savings a healthy boost and also double their personal savings allowance.

"Just remember, while using salary sacrifice to top up a pension helps to secure your future, agreeing to a lower salary will impact your ability to access credit, such as a mortgage, as you will have a lower income to play with. Plus, employee benefits such as life cover, and holiday, sickness and maternity pay may also be affected so ask your employer for a personalised calculation of how the scheme will affect your take-home pay and benefits."

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