An HMRC loophole known as the Starting Rate for Savings allows individuals to increase their tax-free Personal Allowance to as much as £18,570, potentially saving hundreds in tax on interest income. Normally, the Personal Allowance is £12,570, frozen since 2021 and extended until 2031, meaning rising wages drag more people into higher tax brackets. However, those with lower earned income can benefit from this rule.
How the Starting Rate for Savings Works
The Starting Rate for Savings provides up to £5,000 of tax-free interest for people whose other income (wages or pension) is below £17,570. If your earned income is less than £12,570, you qualify for the full £5,000 allowance on top of your Personal Allowance. Additionally, the Personal Savings Allowance adds another £1,000 tax-free interest for basic-rate taxpayers. Combined, these allowances mean you can earn up to £18,570 in total income (earned plus savings interest) without paying tax.
Money 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.”
Example: Cheryl's Tax Savings
As detailed by Martin Lewis’ MoneySavingExpert, consider Cheryl, who has no income from work but £20,000 of savings interest. Her tax bill is just £286. Here’s how: Personal Allowance covers the first £12,570; Starting Rate for Savings covers the next £5,000; Personal Savings Allowance covers the next £1,000. That totals £18,570 tax-free. The remaining £1,430 is taxed at the basic 20% rate, resulting in £286 tax.
Reduction for Higher Earners
If your other income exceeds £12,570, your Starting Rate for Savings is reduced by £1 for every £1 above the Personal Allowance. HMRC states: “You may also get 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.”
For example: if you earn £16,000 in wages and have £200 savings interest, your Personal Allowance uses £12,570. The remaining £3,430 of wages reduces your Starting Rate for Savings from £5,000 to £1,570. Since your interest is only £200, it remains tax-free.
How to Claim
If you have already paid tax on savings interest, you can reclaim it via a Self Assessment Tax Return, with claims possible for the past four years. Check your eligibility and ensure you are not missing out on this valuable tax break.
