Depending on your savings, you may be able to earn income and investment growth from your savings each year without paying tax. However, there’s a limit to how much you can earn in a single tax year before tax applies.
There are different types of allowances – and how much your allowances are depends on your total income.
Your personal allowance is how much income you can receive in a year before getting taxed. Some or all of your personal allowance may be used up against your wages from working or your pension drawdown. Visit the section ‘your tax-free personal allowance’ on the government website to see how much the personal allowance is for the current tax year.
Starting rate for savings
The starting rate for savings is the limit of tax-free savings income, such as interest, you can receive in a single year. This can be up to £5,000 each tax year, but depends on your other income, such as wages or pension drawdown. If you earn over a certain amount from other income, you won’t be eligible for the zero percent starting rate for savings. If you are eligible, the amount you receive depends on how much income you earn above your Personal Allowance.
To check the current income limits for the starting rate for savings, visit the section ‘starting rate for savings’ on the government website.
Your Personal Savings Allowance
You might be eligible for up to £1,000 of tax-free savings income, such as interest, each year depending on which tax band you’re in. If you pay the basic rate of tax, you’re entitled to the whole £1,000 limit. If you’re a higher rate tax-payer, the limit is £500. Additional rate tax-payers are ineligible for the Personal Savings Allowance.
To calculate your tax band, just add all the interest you’ve received to all your other taxable income (such as wages and pension drawdown).
For more information on the tax you’ll pay on interest, visit the government website.
If you sell an investment, any investment growth may be subject to Capital Gains Tax (CGT), if you exceed your annual CGT exemption. For more information on capital gains tax, visit the government website.
Dividend Tax Free Allowance
The dividend tax free allowance is the amount of dividend income you can earn without paying tax. This will be £1,000 in the tax year 2023/24 and will then reduce to £500 in 2024/25. For more information on the tax you will pay on dividend income, visit the government website.
Pension contribution limits
Because pension contributions attract valuable tax relief there are limits on how much you can put in.
The annual allowance - the maximum amount of pension savings you can have each year that benefit from tax relief. In practice, you're subject to a tax charge (the annual allowance charge) where your pension savings (including employer contributions), exceed your available annual allowance for a tax year.
There's nothing to stop you paying in more than your available annual allowance. You'd have to pay an annual allowance charge on the excess but could still claim tax relief on all your personal and third party contributions up to the higher of 100% of your relevant UK earnings or £3,600 per annum (as at March 2022).
The annual allowance charge will probably negate most (if not all) tax relief on the excess above the annual allowance.
The money purchase annual allowance – if you’ve flexibly accessed benefits from a pension, you're subject to a money purchase annual allowance (MPAA) that limits the future contributions you can make to your pension. See the current money purchase annual allowance.
Tapered annual allowance - restricts pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with adjusted income of over £260,000 and threshold income in excess of £200,000 (as at March 2022). See if the tapered annual allowance affects you.