In Australia, the interest you earn on a savings account is taxed as income at your marginal tax rate, the same rate that applies to your wages. There is no separate savings tax and no tax-free savings account, so the interest is simply added to the rest of your income for the year and taxed alongside it. Your bank reports the interest it pays you directly to the ATO, so it is usually pre-filled in your return, and you are required to declare it. How much you pay depends on your total income, and it can range from nothing, if you are under the tax-free threshold, up to 45% plus the Medicare levy at the very top.
How is the interest taxed?
Interest is treated as ordinary assessable income. It is added to your salary, business income, and anything else you earned, and the whole lot is taxed at the marginal rates for the year. For 2025 to 2026 those rates run from nil on the first $18,200, then 16%, 30%, 37%, and 45% on income above $190,000, with the 2% Medicare levy on top for most people. So the rate on your interest is really just the rate that applies to your next dollar of income. There is no special concession that makes savings interest cheaper than other income.
When do you actually pay the tax?
You pay it when you lodge your return for the year you earned the interest, not as you go. Because nothing is withheld along the way, unless you failed to give the bank your tax file number, a big year of interest can turn into a tax bill or a smaller refund than you expected. If you have earned a large amount, it is sensible to set some aside so the bill is not a shock. Interest you leave in the account to compound is still taxed in the year it is credited, even though you have not spent it.
Do you declare it, or does the bank?
Both play a part. The bank reports the interest to the ATO and it is usually pre-filled when you or your accountant prepare your return. But the legal duty to declare it is yours. The ATO matches what the banks report against what you lodge, so leaving interest off is one of the quickest ways to get a please explain letter. It is worth checking the pre-filled figure is complete, especially if you switched banks or opened a new account during the year.
What if you do not give the bank your TFN?
You are not obliged to give your tax file number to open an account, but if you don’t, the bank must withhold tax from your interest at the top rate of 47%, including the Medicare levy. That is far more than most people owe, so you end up overpaying and claiming it back at tax time. The bank does not withhold if you are under 16, or if the account earns less than $420 in interest for the year. For everyone else, quoting your TFN is the simple way to avoid tax being taken out at the highest rate.
How is interest taxed on a joint account?
Interest on a joint account is split equally between the holders, so a couple with a shared account each declares half and pays tax on their share at their own rate. If the money is genuinely owned in unequal shares, you can split it to match, as long as you keep a record of how you worked it out. Whose name appears first on the account makes no difference to who is taxed.
How much tax will you actually pay?
Because it is taxed at your marginal rate, the cost depends on your income. If you earned $2,000 of interest and your marginal rate is 30%, that adds about $600 to your tax for the year, a little more once the Medicare levy is counted. On the same $2,000, someone on the top rate pays around $940, while someone whose total income is under the tax-free threshold pays nothing at all. The same interest can cost very different amounts depending on who earns it, which is worth keeping in mind for couples deciding whose name the savings should sit in.
Can you legally pay less tax on savings interest?
You cannot make the interest tax-free, but you can earn it in a smarter place. The most effective move for anyone with a home loan is a mortgage offset account: money in an offset reduces the interest charged on your loan instead of earning you interest, so there is nothing to be taxed. Couples can hold savings in the name of the lower earner, so the interest is taxed at their lower rate, and longer-term savings can be more tax-effective inside super, which is taxed at 15% rather than your full marginal rate. These are planning decisions rather than quick fixes, so our tax planning checklist and our business and tax advisers are good starting points if you want to work out what suits you.
Do term deposits work the same way?
Yes. Term deposit interest is also taxed at your marginal rate, in the year it is credited to you. For a term deposit that matures in a later year, the interest is generally taxed in the year it is paid or credited, rather than spread across the term, which can push a lump of interest into a single year’s income. If that amount is large, it is worth thinking about the timing before you lock the money in.
