Households in the UK are being urged to explore a tax loophole that could allow them to earn up to £18,570 tax-free. Normally, workers can earn £12,570 without paying Income Tax, known as the Personal Allowance.
However, those earning less than £18,570 per year can boost their tax-free allowance to that amount by using a little-known HMRC rule called the Starting Rate for Savings. This allows individuals to add an extra £5,000 tax-free allowance specifically for savings interest income.
If your income from work or a pension is less than £12,570, you’re eligible for the full £5,000 allowance, allowing you to earn up to £5,000 in interest without paying tax. You can also add a further £1,000 thanks to the standard Personal Savings Allowance, enabling you to earn an extra £1,000 of savings interest tax-free.
Financial expert Martin Lewis explains: “If you earn less than £18,570 a year from earned income and savings combined, then all your interest from those savings could be tax-free.
“That’s because you get your personal allowance before you start to pay income tax (£12,570), plus the starting rate for savings (up to £5,000) and the personal savings allowance (£1,000) all in combination.”
It’s important to note that for those earning over £12,570, their starting savings rate allowance will decrease by £1 for every £1 they go over the limit, reports Chronicle Live.
As explained by Martin Lewis’ Money Saving Expert: “Cheryl: No income from work, has £20,000 of savings income. In this case, Cheryl will be liable to pay tax amounting to a mere £286. Given that she has no earned income, the interest on her savings is largely covered by a mix of allowances: Personal allowance – the initial £12,570 is exempt from tax. Starting savings rate – the subsequent £5,000 is also tax-free, meaning £17,570 of the interest income is taxed at 0%. Personal savings allowance – ensures the next £1,000 is tax-free, so £18,570 is taxed at 0%.”
This leaves Cheryl with £1,430 of savings income which she will need to pay tax on. As she has no other income, this will be charged at the basic 20% rate, so she’ll pay £286 in tax.
HMRC clarifies: “You may also receive up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
“The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be. “You’re not eligible for the starting rate for savings if your other income is £17,570 or more. Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
“HMRC provides an example: “You earn £16,000 of wages and get £200 interest on your savings. Your Personal Allowance is £12,570.
“It’s used up by the first £12,570 of your wages. The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.
“Cheryl: No income from work, has £20,000 of savings income. In this scenario, Cheryl will need to pay tax of just £286. As she has no earned income, the savings interest is mostly covered by a combination of allowances:Personal allowance – the first £12,570 is tax-freeStarting savings rate – the next £5,000 is tax-free, so now £17,570 of the interest income is taxed at 0%Personal savings allowance – means the next £1,000 is tax-free, so £18,570 is taxed at 0%.
“Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest.”
If you have previously paid tax on your savings income, it is possible to claim a refund through a Self Assessment Tax Return, with the option to backdate the claim by up to four years.
At Reach and across our entities we and our partners use information collected through cookies and other identifiers from your device to improve experience on our site, analyse how it is used and to show personalised advertising. You can opt out of the sale or sharing of your data, at any time clicking the “Do Not Sell or Share my Data” button at the bottom of the webpage. Please note that your preferences are browser specific. Use of our website and any of our services represents your acceptance of the use of cookies and consent to the practices described in our Privacy Notice and Cookie Notice.
