Martin Lewis has drawn attention to a tax-free allowance that many pensioners may not realize they are entitled to. While many people are aware of the personal savings allowance, which allows basic rate taxpayers to earn £1,000 in interest tax-free each year, there is another lesser-known benefit called the starting rate for savings.
What Is the Starting Rate for Savings?
Speaking on his BBC podcast, the money-saving expert explained that the starting rate for savings provides an additional tax-free allowance of up to £5,000 on savings interest. This is available to individuals with low earned income but high savings interest. Mr. Lewis noted that pensioners often fall into this category, as they may have modest pension income but significant savings accumulated over the years.
The starting rate works alongside the personal allowance, which currently allows individuals to earn up to £12,570 a year without paying income tax. Once the personal allowance is used, the starting rate allows an additional £5,000 of savings interest to be tax-free. However, this allowance is reduced by £1 for every £1 earned above the personal allowance from other taxable sources, such as employment or pensions. Once other income reaches £17,570, the starting rate is no longer available.
How It Differs from the Personal Savings Allowance
The personal savings allowance is separate and varies by tax band: basic rate taxpayers can earn up to £1,000 interest tax-free, higher rate taxpayers get £500, and additional rate taxpayers receive no allowance. The starting rate for savings can be used in addition to the personal savings allowance, potentially offering a combined tax-free allowance of up to £6,000.
Mr. Lewis provided an example: a person with a pension income of £12,500 and savings interest of £4,400 would normally owe tax on £3,330 of interest after using the personal allowance and personal savings allowance. However, with the full starting rate allowance, all £4,400 of interest becomes tax-free, and they could earn an additional £1,600 in interest without incurring tax.
He emphasized that this rule is particularly beneficial for pensioners with low earned income and high savings interest. He advised individuals to assess their own financial situation to see if they qualify.
