Households are being urged to check if they qualify for a tax-free allowance of up to £18,570
Households are being encouraged to check whether they could earn as much as £18,570 without having to pay tax on it, following confirmation of a Personal Allowance loophole by HMRC. Ordinarily, anyone receiving an income whether through employment, a pension, or property can only earn £12,570 before Income Tax applies.
This is referred to as the Personal Allowance, which has been frozen since 2021 and was recently extended by former Chancellor Rachel Reeves for a further period, until 2031.
Prime Minister Andy Burnham has been reported as considering a £3,000 rise to the threshold, but has not committed to any change, pledging only to ‘look at’ the matter ahead of the next Budget. Should the current freeze remain in place until 2031 as planned, many people face increasingly larger tax bills as wages rise year on year, pulling more earners into higher Income Tax thresholds.
However, if you earned under £18,570 in a year, you could potentially boost your tax-free allowance to that figure via a HMRC loophole known as the Starting Rate for Savings. For money-saving tips, sign up to our Money newsletter here
The Starting Rate for Savings enables individuals to add a further £5,000 to their tax-free allowance on savings interest income. If you earn less than £12,570 from employment or your pension, you may be entitled to the full £5,000 allowance, meaning you can earn up to £5,000 in interest without paying a single penny in tax, reports the Express.
A further £1,000 can be added on top through the standard Personal Savings Allowance, meaning you can earn an additional £1,000 in savings interest without being liable for tax on that amount 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.”
Those earning above £12,570 lose £1 of their starting savings rate allowance for every £1 over that 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.”
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.”
Should you have already paid tax on your savings income, it is possible to reclaim this through a Self Assessment Tax Return, and you are able to backdate your claim for any of the previous four years.
