Households are being urged to check if they could earn as much as £18,570 without paying any tax on it, thanks to a Personal Allowance loophole confirmed and supplied by HMRC. Usually, anyone who receives an income through work, pension, or property can only earn £12,570 without paying Income Tax. This is known as the Personal Allowance, frozen since 2021 and extended by ex-Chancellor Rachel Reeves until 2031.
How the Starting Rate for Savings works
The loophole, known as the Starting Rate for Savings, allows people to add another £5,000 to their tax-free allowance for savings interest income. If you earn less than £12,570 from work or pension, you get the full £5,000 allowance, meaning you can earn up to £5,000 in interest without paying tax. An additional £1,000 from the standard Personal Savings Allowance can also be added, making another £1,000 of savings interest tax-free.
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.”
Who loses out and how to reclaim
Those earning over £12,570 lose £1 of their starting savings rate allowance for every £1 over the threshold. HMRC notes that 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 of wages and get £200 interest, your remaining starting rate is £1,570, so you won't pay tax on the £200 interest.
If you have already paid tax on savings income, you can reclaim it via a Self Assessment Tax Return and backdate your claim for the past four years.
