Savings allowances explained as Rachel Reeves approves tax crackdown

Chancellor Rachel Reeves has reportedly given the green light to new rules that will make people with savings accounts provide their National Insurance number. This move is aimed at making it simpler for HMRC to collect tax from savers who exceed their personal savings allowance.

The new requirements are expected to be incorporated into legislation next year, and banks are set to implement them from April 2027. This will result in workers paying tax on their savings interest directly from their wages, eliminating the need for a self-assessment if their interest goes over their savings allowance. The savings allowance refers to the maximum amount of interest you can earn from your savings accounts each year before it becomes taxable as income.

The size of your allowance hinges on your other income, with three potential options.

Personal Savings Allowance

This allowance is linked to your income tax band. Those on the basic rate, taxed at 20%, can earn up to £1,000 in interest each year before they are required to pay tax on it.

Those in the higher rate bracket, paying 40% income tax, have a personal savings allowance of just £500. Lastly, those on the additional income tax rate do not have any personal savings allowance, meaning they are taxed on the interest earned by their savings from the very first penny.

Personal Allowance

Your personal allowance is the sum you can earn from any income source each year before you're required to pay income tax. For the majority, this limit stands at £12,570 and if the full amount isn't used on other income such as wages or pension, it can also be applied to interest earned on savings.

Starting rate

If your other income is less than £17,570 per annum, you qualify for the starting rate for savings which allows you to earn up to £5,000 in interest before paying tax on it. The exact amount you can receive depends on whether your other income exceeds your personal allowance.

For every £1 over, your starting rate will decrease by £1. For instance, if you earn £16,000 in wages, that's £3,430 above the personal allowance. The £5,000 maximum will be reduced by £3,430 leaving you with a maximum of £1,570 you can earn in interest before being taxed.

These allowances apply to interest earned on any of the following:

• Bank and building society accounts
• Savings and credit union accounts
• Unit trusts, investment trusts and open-ended investment companies
• Peer-to-peer lending
• Trust funds

• Payment protection insurance (PPI)
• Government or company bonds
• Life annuity payments
• Some life insurance contracts

However, savings in specific tax-free products won't count towards your allowance. Like ISAs and some NS&I accounts. If you have joint accounts, the interest will be divided equally among all of the account holders. More information on savings allowance can be found on the Gov.uk website.

If you exceed your savings allowance, your interest will be taxed at your standard rate of income tax. According to the Telegraph, an estimated 3.35 million savers will have taxable savings income this year.