How Much Interest on 1 Million Pounds Could I Make?

How much interest on £1 million will I earn after tax?

As everyone’s tax situation is somewhat unique, it’s difficult to provide an answer that will be universally correct. Nevertheless, we can still work out something approximate. Let’s assume two different situations for now: someone who is just earning interest on their £1 million and has no salary and another person who is earning an average salary plus the interest from their £1 million.

The first case is easy. If you have no other income, apart from your £1 million that is deposited in a savings account, your after-tax take-home annual income would be £35,642.40. This is calculated assuming the following:

• 4.7% annual interest rate on your deposit in a taxable account
• £0 in salary, dividends, capital gains, or pension income
• Marginal tax bracket: Basic Rate @ 20% as interest income of £46,000 (£47k less £1000 allowance) is in the £12,571 to £50,270 bucket
• £1000 allowance on interest income as per the tax code in 2022/23
• National Insurance payment of £4,071.60 at a blended 8.85% rate.
• Not claiming any allowances
• Not a resident of Scotland, where tax rates are different from those I used here

For our second case, someone earning the average UK wage of around £33,000 annually (as of 2023) along with the £47,000 of interest income would fall in to the Higher Rate category. For this person, the after-tax take-home interest income on £1 million would be £28,115.85. The assumptions here are:

• All of the assumptions used in the first case, except where outlined below
• Marginal tax bracket: Higher Rate @ 40%
• £500 allowance on interest income for Higher Rate bucket.
• Interest income is counted as the marginal income, meaning we are notionally assigning the higher tax bracket to this stream.
• National Insurance is paid on this interest income.

Can I live for the rest of my life on the interest of one million pounds?

Now that you know that you can earn money by just leaving it in a savings account, it is only natural to wonder whether or not you could live off of that money. Sadly, that is not likely to be the case, especially when looking at the after-tax income. You could move to a place where the cost of living is low to make ends meet, but even then, you might struggle to live a comfortable life without any sacrifices.

While putting money in a savings account is a great idea, and you can get a significant amount of income (depending of course on the interest rate that your bank has set), however, there will not be enough to live off in the long run. Therefore, if you have designs on retiring on a million – unless you are no longer working for a living, it’s unlikely to sustain you, as things stand.

First of all, banks typically only pay the interest once a year. You therefore would not have a set amount coming in each month. Secondly, if your money is tied up in a long-term deposit, you typically cannot access your money before the deposit matures. If you do try to access that money early, there is typically a penalty.

Simply put, becoming a millionaire isn’t as hallowed as it might seem – you’ll need significantly more before you can put your feet up for good. Sorry! If you had £20 million or £100 million in the bank, you could definitely live off that interest income stream alone!

That said, you can make that million travel further – you just have to be careful with where you invest it. .

How can I better ensure an income with my 1 million pounds? 

As wise as it is to keep money in savings, and as capable as banks are at providing competitive interest rates on savings while protecting your capital, you will sadly not be able to live off the interest income from your bank account alone. It’s a clear reason why so many people choose to invest in a variety of different investments.

Even in the financial markets, there is a whole gamut of investment options – from low risk funds to much higher risk equity funds. Stocks and bonds rise and fall in value, unlike your bank deposit. Even dividends can get cut entirely. However, invariably, they can provide a little more in the way of a potential return. The return potential on £1 million is pretty good – it all depends on the types of investment you choose, whether it’s likely to be impacted by political change, and how much you put into your chosen company or resource.

Even if you know a little bit about investing in stocks and shares, you’ll likely have heard that diversification is important. But what does this actually mean?

Remember the phrase ‘don’t put all your eggs in one basket’? Crucially, diversifying investments follows this rule. If you were to put your whole million into Tesla tomorrow, for example, and the stock took a dip, you’d lose a large chunk of money. It may not affect you unless you cash out, but what if that value never bounces back?

Investing money in stocks, shares and commodities always carries risks. That’s why the best financial advisors and the most successful traders refer to diversification as the key to good financial health.

Tracker funds that are considered low risk, too, may be worth looking into if you are keen to experience the highs of the markets, but still want safety. ETFs, which bring together a variety of investments into viable bundles, are also appealing to those with a low-risk attitude.

Aside from the financial markets, there are even other options for the investing your £1 million to generate differentiated returns.

Is it better to save your money or invest it? 

Saving that £1 million doesn’t have to be a poor decision. In fact, it’s considered the safest choice – there’s no risk in your investment decreasing – you’d simply not get much back on your money in the long run.

This is a strong argument for investing a good chunk of that £1 million in the stock market – crucially, base interest savings will never help you achieve your dreams of never having to work again, unless you have a lot more capital to hand in the first place.

However, by investing your money in stocks, shares, ETFs and bonds, you do run the risk of losing it all. That’s why it always pays to discuss your potential investment plans with a financial advisor before you decide upon the best course of action. It also almost certainly pays to look at different types of fund and stock – and to diversify – in case your chosen stakes go south quickly.

So, the choice is yours. Do I keep my money safe, with no potential to grow substantially in a bank account? Or, do I invest my money either by myself, or with the help of a professional financial advisor? 

Either way, that £1 million could grow larger – you just need to carefully consider your options.

Is my £1 million safe in a bank?

The answer to this question can be divided in two parts:

Normal Circumstances: Under normal circumstances, if your money is deposited in a bank (it must be a bank), the money is safe. Banks are well regulated and monitored in the UK. The regulators in the UK are the Financial Conduct Authority and the Prudential Regulation Authority. It is their job to ensure that banks are operated in a proper manner, so that depositors do not lose their money.

Extremely Rare Circumstances: In the extremely rare circumstance, such as a major financial crisis, or very well hidden fraud and misconduct, a bank could face solvency issues and potentially go under. The FSCS steps in to compensate depositors in those rare cases. Typically FSCS insurance is limited on deposits of up to £85,000 only. However the FSCS will cover your deposits of up to £1 million if it deems that your account balance qualifies as a “temporary high balance“. Examples of a temporary high balance include funds incoming from a real estate transaction, an inheritance, insurance claim, etc. This amount cannot be in your account for longer than 6 months. However if your account routinely has millions of pounds moving through it, or your million pounds deposit sat in one account for years, you may not qualify. These occurrences are extremely rare, so it’s not something I would lose any sleep over.

What is an interest rate? 

Essentially, interest is the money that is paid by the borrower to the lender. It can be thought of simplistically as the cost of borrowing money. The higher the interest rate, the higher the cost to the borrower and the higher the income to the lender.

When you deposit your money in the bank, you are a lender to the bank. As a result the bank pays you for borrowing your money. By depositing your £1 million, or indeed any amount, in a bank, you will accrue interest on it. While the money is yours, keeping your money in savings account, an ISA, or similar product is effectively lending the money to the bank.

So, when the year is up, the bank will add money to your savings account based on the interest rate. The higher the rate, the more money you could accrue without having to lift a finger. It’s why there is often so much pressure on people to compare these rates when choosing ISAs and other savings accounts!

The interest rate is the amount of interest that you will gain on your investment at that particular moment. Be warned, however, that interest rates rise and fall constantly. For example, a bank may set you up with a 5% interest rate for your first year of savings, but may drop this to as low as 3% for the year after.

It’s worth remembering that interest rates for banks change based on a variety of factors, so let’s dig a bit deeper into the issue.

Stock Market Returns Are Not Interest

The internet has a lot of misleading advice. Many articles will suggest that you can generate “interest” from investing in the stock market. 

The stock market generates returns in the form of dividends and capital gains and losses, but it never generates interest. Similarly bonds pay coupons, which can fluctuate. Additionally with bonds, there is always the risk of losing some or all of your capital if the borrower defaults. A mutual fund, which invests in stocks and/or bonds, can therefore never generate interest income for you.

The key difference between stock market returns and bank interest is that market returns fluctuate quite wildly and are never guaranteed; whereas interest income from a deposit in bank is relatively stable and in many cases can be guaranteed. Additionally, in the stock market you can lose all your capital. In a regulated bank, your odds of losing your capital is almost negligible. This is the basis of the modern financial system.

The interest you earn at a bank is on top of your deposit; and while your deposit may be locked in for a certain period of time, besides extremely rare (rarest of the rare) situations, you will never lose your capital.

What determines a bank’s interest rate? 

Banks around the world determine their interest rates based on a few things, but here in the UK, most banks tend to be led by the same common factor – the Bank of England’s base rate.

This rate affects those that banks across the UK that provide for both savings accounts and bank loans. Although they do not have to follow the BOE base rate by law, most UK banks follow it, even as it rises and falls. 

This makes sense – as it helps to keep bank rates and interest levels competitive. It also means that UK banks are held accountable to a firm standard. If the BOE base was much higher than a bank’s standard interest, it’s likely few would want to take advantage!

Let’s consider the current BOE base rate. Due to the current inflationary environment and geopolitical challenges across the globe, even here in the UK, the base rate for the Bank of England has risen to 4.0%. Surprisingly, this is the highest it has been in the last decade! In the midst of the Covid-19 crisis, the rate was as low as 0.10%!

So, if you look to your bank, you will likely find that whatever rate they are offering on your savings account or bank loan will match that, or at least very closely. It’s to reflect the current economic struggles we’re all facing – with inflation on the rise, too.

So, to put that into an interest perspective, were you to put that £1 million into a savings account, say like the Instant Savings account with Chip, you would earn 3.0% AER on it. This works out £30,000 of interest income per year. However if you extend your term and go with a 5-year fixed term account, you can make as high as 4.7% AER. This works out to interest income of £47,000 per year.

This is how interest rates typically work – the longer that you lock in your money, the higher the interest rate you can achieve. However, that doesn’t mean you’re restricted to just £47,000 on a £1 million savings pot. There are some banks, for example, that go even higher! For each extra 0.1% interest rate, you can expect an additional £1,000 in interest income over the year.