Savings interest tax for a client's cash: £5,000 starting rate that shrinks £1 for every £1 of other income, then £1,000 or £500 allowance, worked

A paraplanner is preparing a review pack for a client with £60,000 in cash savings and a salary of £45,000. The adviser asks whether the interest will be taxed. The answer is on one GOV.UK page, and the working is short enough to set out for any client.

The rules on GOV.UK

The page "How much is tax free" gives two allowances, both for each tax year (6 April to 5 April).

Starting rate for savings. "This means you can earn up to £5,000 of interest and not have to pay tax on it." It applies where other taxable income is below £17,570. "Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1."

Personal Savings Allowance.

Where £17,570 comes from

The Personal Allowance is £12,570 and the full starting rate is £5,000, so £12,570 + £5,000 = £17,570. The page's own example agrees: £16,000 of wages is £3,430 above the Personal Allowance, and £5,000 - £3,430 = £1,570 left, which covers £200 of interest.

How much starting rate is left

Starting rate left = £17,570 - other income (nil if that comes out negative), assuming the other income is all taxable above the Personal Allowance.

A client on £45,000 has no starting rate at all, so only the Personal Savings Allowance helps them.

When does cash start to cost tax?

The page gives no interest rates. For illustration we assume 4% a year. This is our assumption, so replace it with the client's actual rate.

• Basic rate: £1,000 / 0.04 = £25,000 of cash before interest passes the allowance.
• Higher rate: £500 / 0.04 = £12,500 of cash.

Check: £25,000 x 4% = £1,000 and £12,500 x 4% = £500.

So the £45,000 client above, who is a basic rate taxpayer, has £60,000 x 4% = £2,400 of interest. The £1,400 above the £1,000 allowance is taxed at 20%, the rate the GOV.UK page uses in its own example: £1,400 x 20% = £280.

Tax on three interest levels

The GOV.UK example has a basic rate taxpayer with £1,300 of interest paying 20% on £300, which is £60. The same method for other amounts, with 40% for higher rate (the higher rate came from the GOV.UK rates page read in the Personal Allowance taper guide; this savings page did not state it):

Check on the middle row: £2,000 x 0.20 = £400 and £2,500 x 0.40 = £1,000. A higher rate client pays £600 more than a basic rate client on the same £3,000 of interest, and it follows that the band matters more than the balance.

I did not work additional rate clients, because the page gives them a £0 allowance but the tax rate was not on it.

What to put on the review note

• Which band, this year. The allowance follows the tax band, so a client whose income rises past the higher rate threshold loses £500 of allowance in the same year.
• Interest actually paid. The page says banks tell HMRC after 5 April, and HMRC estimates interest from the previous year when it sets a tax code. The note should compare that estimate with the real figure.
• Cash that could sit elsewhere. Whether cash belongs in a different wrapper is the adviser's decision. For the ISA side of that conversation see the Cash ISA limit guide.
• Other allowances. The Personal Allowance taper and the Child Benefit charge both depend on income, and interest counts towards income.

For the wider review file, see the annual review checklist.

Overlyft builds AI staff who join your advice team and read each client's balances before the review, flag those whose interest is likely to pass the £1,000 or £500 allowance, and prepare the one-page comparison for the adviser to approve.

This is general information, not financial advice. Check GOV.UK and the client's circumstances before you advise.