A couple asked Mr Lewis a question about tax on savings
Martin Lewis has issued a rallying cry for savers who could be missing out on a valuable income boost. He said that it is particularly important to check your situation if you are in receipt of certain DWP benefits.
The consumer champion shared the guidance following a question on his BBC podcast from a couple enquiring about when they would be liable to pay tax on their savings. The married pair, both in their 50s, revealed their sole income came from the Employment and Support Allowance (ESA) Support Group and Carer’s Allowance.
They went on to explain that they also hold £150,000 in savings, generating £2,300 in interest annually. Their question for the consumer expert was whether they would be required to pay tax on those savings.
In his response, Mr Lewis suggested the couple were potentially asking the “wrong question” given their level of interest earnings. Regarding their £2,300 annual return, he said: “That’s just not enough interest. There are lots of savings accounts paying you over four per cent, some at 4.5 per cent.”
‘Really important’
Mr Lewis explained that it was especially vital for the couple to take action given their personal circumstances. He said: “I suspect life is quite difficult, because I know that Employment and Support Allowance is a benefit for people who have a disability or health condition that limits your ability to work.
“So it’s really important that you make those savings work as best as they possibly can for you.” He said the couple could potentially be earning nearly £5,000 in interest by transferring their money into an account offering a more competitive rate.
This would represent an additional £2,700 on top of their current £2,300 earnings. With their £150,000 in savings at 4 per cent, you would generate £6,000 in interest over the course of a year. At 4.5 per cent, that figure would rise to £6,750 annually.
Key ‘starting point’
Mr Lewis told the couple: “The most important start point is you that you should be in savings accounts that pay more.” Mr Lewis suggested that one way to protect their savings from tax while securing a better rate would be to place them into an ISA.
At present, each individual can deposit up to £20,000 annually into ISAs. The allowance can be split between cash ISAs and stocks and shares ISAs, according to your personal preference.
Mr Lewis added that beyond this, they could place their funds into a competitive easy access account, where rates of up to 4.5 per cent are currently available. Mr Lewis said it is worth exploring the savings market, as there are “loads more” accounts offering rates above 4 per cent.
Tax allowances
Addressing the question of tax, Mr Lewis said that given they were on ESA and Carer’s Allowance, their income would likely amount to approximately £220 to £230 per week, equivalent to roughly £11,440 or £11,960 per year. This means they would each fall beneath the personal allowance, which permits an individual to receive up to £12,570 annually without paying income tax, including earnings from savings interest.
Nevertheless, Mr Lewis highlighted there is an additional allowance on top worth noting here. Each individual also receives a starting rate for savings, an extra £5,000 allowance beyond your personal allowance for your interest income.
This decreases by £1 for every £1 of earnings you have exceeding the personal allowance, meaning you receive no starter rate once your earnings reach £17,570 annually. Separate from this, a basic rate taxpayer can also generate up to £1,000 in interest tax-free each financial year.
