Fact check: Savers have long had to pay tax if earning…

Fact check: Savers have long had to pay tax if earning more than £1,000 interest

To pay tax on interest, someone with £10,000 in savings would need to be a higher rate taxpayer and have their savings in an account with over 5% in interest. (Dominic Lipinski/PA) - (PA Wire)

A widely shared video on social media claimed that the Government is “now going to tax you if you have savings of over £10,000”.

Evaluation

The Government does not tax people on their savings, but the interest earned on savings has long been eligible for income tax. Under the current rules – introduced in 2016 – a higher rate taxpayer must pay income tax on any interest they earn above £500 each year.

That means that if they have £10,000 in a savings account with a 5% interest rate they will be eligible to start paying tax. However, they can easily avoid that by putting their savings into an ISA account, which is tax-free.

Anyone who earns more than £10,000 from investment dividends or interest on savings needs to fill out a self-assessment tax return.

The facts

– Tax on savings

It is unclear where the original source for this claim might come from. It is possible that the person posting has seen warnings from financial journalist Martin Lewis that higher interest rates mean that people who did not previously pay tax on their savings would have to start doing so.

As Mr Lewis explained in his ITV show on November 5 2024 (from around 21 minutes), this is because people can earn up to a certain amount in interest tax-free, depending on their tax bracket.

A basic rate taxpayer (earning between £12,571 and £50,270 per year) can earn up to £1,000 in savings interest before paying tax on the excess; a higher rate taxpayer (getting between £50,271 and £125,140) can make up to £500 in tax-free interest, while those earning over £125,140 have no tax-free threshold on interest.

Any amount of interest above these levels is eligible for income tax.

This system has been in place since 2016. When interest rates for savers were lower, only those with high levels of money put aside could hope to make more than £1,000 or £500 in interest every year. For example, at a 1% interest rate, a basic rate payer would need £100,000 in savings before they had to pay income tax on the interest about their threshold.

As interest rates have increased, this calculation has changed, which is not directly due to any change in Government policy; it is simply because savers can now earn higher rates of interest.

Mr Lewis used the example that someone on who is earning between £50,271 to £125,140 per year with £10,000 or more in savings in an account now yielding 5% per year would be earning at least £500 in interest and therefore liable to pay tax on the amount they receive over their threshold.

As Mr Lewis also points out, someone who wanted to avoid this tax could use an Individual Savings Account (ISA) on which tax is never paid, no matter how much has accumulated. However, an individual can only put up to £20,000 a year into an ISA.

– Self-assessment tax returns

It is also possible that the video is based on a misunderstanding of a recent social media post from HM Revenue and Customs (HMRC).

On December 3, HMRC’s account on X told a user that “If you have more than £10,000 from dividends or savings and interest, you would need to complete a self-assessment tax return.”

To make £10,000 from interest on a savings account would require someone to have £200,000 in an account yielding 5%.

As HMRC added: “If you have a (sic) Individual Savings Account (ISA), this is tax free as well as some National Savings and Investment accounts.”