More than five million Australians will earn more interest on their Savings in banks, building societies and credit unions, under a government proposal to halve the tax paid on the interest they receive.

Instead of paying $160 in tax on $10,000 of savings in a bank account that earns 5 per cent interest, the Australian taxpayer will only have to pay $80 in tax on the interest earned in 2012-13.

Under the present system, all interest earned on savings is taxed. The interest is considered additional income, which is added to the taxpayer's annual earnings.

With the proposed changes, the taxpayer will be given a tax rebate of 50 per cent on the interest earned.