HMRC is set to deliver a harsh blow to 82,000 UK households by demanding an additional £992 due to a lesser-known stealth tax. Low-income households will be left £992 out of pocket, but there is a way to avoid it.
If your earnings are below the £12,570 personal allowance, you are not required to pay any tax on your income. Additionally, low earners can accrue up to £5,000 in interest on their savings without paying tax, under the “starting rate for savings”. The decision to freeze the personal allowance until 2030 in the Labour Party Autumn Budget will leave people worse off. If tax bands had risen with inflation, the threshold would be £15,550 today.
This means someone earning £15,549 and £5,000 interest would not have to pay any tax. However, these earners are now paying £596 in income tax plus £396 on their savings interest – leaving them £992 worse off. Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It means you don’t have to worry about the freeze in the threshold, or the impact of inflation-linked rises on your income – your savings interest is completely protected from income tax.”
The starter rate for savings implies that if your income from pension or work is under the personal allowance (£12,570), you get the full £5,000, meaning you can earn up to five grand in savings interest without being taxed. If your income exceeds the personal allowance, you forfeit £1 of the £5,000 starting rate for each £1 above the allowance. If your income is £17,570 or more, you do not qualify for any of the £5,000 starting rate.
Charlene Young, a senior pensions and savings expert at AJ Bell, advised: “You could give your spouse cash savings to use up their tax-free personal savings allowance. That’s especially helpful if you’re a higher or additional rate taxpayer and your partner is a basic rate taxpayer, meaning they benefit from the full £1,000 personal savings allowance.”
