An HMRC rule could allow some households to earn as much as £18,570 without paying any tax on it, combining the standard tax-free Personal Allowance with a savings rate allowance.
Usually, anyone receiving income through work, a pension or property can only earn £12,570 without paying Income Tax. This Personal Allowance has been frozen since 2021, and was extended by former Chancellor Rachel Reeves for several more years, until 2031. Prime Minister Andy Burnham and Chancellor John Healey refused to change the threshold in the most recent Budget last month, a decision money campaigner Martin Lewis described as the “biggest tax rise in recent history”.
How the savings rate boosts your allowance
The Starting Rate for Savings allows people to earn another £5,000 tax-free on top of their tax-free allowance threshold via savings interest income. If you earn less than £12,570 from work or your pension, you can get the full £5,000 allowance, meaning you can earn up to £5,000 in interest without paying tax on it.
You can then add another £1,000 on top from the standard Personal Savings Allowance, meaning you can earn another £1,000 of savings interest without paying tax on that either.
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.”
How the allowances work in practice
Those who earn over £12,570 lose £1 of their starting savings rate allowance for every £1 over the threshold. As Martin Lewis’ MSE sets out: “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-free
- Starting 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%.
“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.”
Eligibility and reclaiming tax
HMRC explains: “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.
“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 gives the 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.
“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 already paid tax on your savings income, you can reclaim it via a Self Assessment Tax Return and can backdate your claim for any of the past four years.
