If you’ve been saving for a little while and watched your rainy-day pot grow into a nest egg, then you may be starting to wonder what kind of tax you’ll need to pay. The rules around tax savings can be a little bit complicated, so we’ve tried to lay them out simply for those who are navigating them for the first time.

You only pay tax on the interest you earn

When we talk about tax paid on your savings, we’re talking about the interest, not the savings themselves. This may seem obvious, but it’s worth being clear: the tax office won’t make a claim on the money that you’ve stashed away, just the earnings that you make on top.

Your first £1,000 of interest is tax free

Everyone in the UK has a personal savings allowance of £1,000. This means that the first £1,000 of interest you earn is not eligible to be taxed. It effectively means that most average savers in the UK won’t need to pay tax on their savings, especially with interest rates as low as they are currently.

As an illustration, £20,000 earning a relatively generous 2% interest rate would net you £400 over the course of the year. Average savings vary depending on who’s doing the calculation, but don’t typically go higher than this.

For higher rate tax payers, this allowance reduces to £500.

If you’re on a low income, your tax-free allowance is higher

Those earning under £17,500 are also eligible for what’s known as the savings ‘starting rate’. If you earn under £12,500, your starting rate will be £5,000, meaning that you can earn 5,000 in interest without paying tax. The starting rate decreases by one pound for every pound you earn above the £12,500 threshold.

If this all sounds complex then don’t worry. The bottom line is that you’re unlikely to pay tax on your savings when you’re on a low income unless you have an exceptionally high savings balance.

Money in an ISA is exempt from tax

Every year, you can save up to £20,000 in a cash ISA, or invest it in a stocks and shares ISA. This money is not taxable, so any interest that you earn is yours to keep.

The amount of tax that you pay is determined by your income

If you do end up with savings interest that takes you over the tax threshold, you’ll pay 20% in tax as a basic rate taxpayer or 40% at the higher rate. For those on the additional rate, it goes up to 45%.

Get advice if you’re unsure

The information laid out above shows that most of us don’t need to worry about paying tax on our savings. However suddenly coming into some money – perhaps from inheritance, or a competition win – could change that. In that case, we would recommend speaking to a professional who can advise on your individual circumstances. That might include making suggestions on where to store your money and how to invest it as well as what tax to pay.