He warned people often don’t know about the extra amount
Martin Lewis has highlighted a tax-free allowance that can apply to pensioners that you may not be aware of. While you might know about one tax-free threshold you can earn annually, there’s another “special allowance” that certain individuals are eligible for.
The savings expert discussed on his BBC podcast the often overlooked starting rate for savings, which can significantly increase your tax-free entitlements. Mr Lewis explained to listeners: “There is the personal savings allowance, which I suspect many listeners will know about, which says a basic rate taxpayer can earn £1,000 of interest a year on any form of savings without being taxed.”
‘Special allowance’
But the tax-free perks from HMRC don’t end there. Mr Lewis revealed: “There is another allowance that people don’t know about. It is called the starting savings allowance.
“What happens with the starting rate of savings is if you have high savings interest and low earnings, then it is a special allowance that means up to the first £5,000 of your savings interest can be tax free, plus you get the personal savings allowance on top.”
Mr Lewis noted that pensioners especially could benefit from this provision, as they may receive a comparatively modest income from their pension savings, while having a substantial savings pot accumulated over the years, generating considerable interest annually.
How does the starting rate for savings work?
The starting rate functions so that once you’ve exhausted the personal allowance, which permits you to earn up to £12,570 annually without paying income tax, you can then earn an additional £5,000 in savings interest on top of this without any tax liability on those interest earnings.
This allowance decreases by £1 for every £1 you earn above the personal allowance through other taxable income sources, such as employment or pensions. Therefore, once your income from other sources totals £17,570, you receive no starter rate for savings.
This operates separately from the personal savings allowance, which differs depending on your tax band. Basic rate taxpayers can earn up to £1,000 of interest tax-free, while higher rate taxpayers receive a £500 allowance.
Those on the additional rate receive zero allowance and must pay tax on all their interest earnings outside ISAs. Mr Lewis provided an example of someone with an annual pension income of £12,500 while earning £4,400 in interest from savings outside an ISA wrapper, resulting in total taxable income of £16,900.
If they only had the £1,000 personal savings allowance on top of the personal allowance, they would pay 20 per cent on £3,330 of their income, resulting in a £666 bill to HMRC. However, thanks to the full £5,000 allowance from the starting rate being added to their personal allowance, none of their £4,400 interest payments would incur a tax bill.
£6,000 in total allowances
In reality, they would enjoy a combined savings tax-free allowance of £6,000, meaning they could earn an additional £1,600 of interest earnings without paying tax. Mr Lewis worked out the figures: “Someone who earnt £12,570 from earnt income and had £6,000 of interest from savings outside of ISAs could have all £18,570 tax-free.
“Obviously, you’ll need to do some thinking about how this applies to you. Effectively it was set up for people who have a low earnt income and high savings interest.
“Primarily it’s pensioners who tend to be in that situation, who have got savings built up over the years but are no longer working and are just living off pensions that are at a relatively low level, and it works there.”
