The ITV expert explained a rarely spoken about a tax allowance that could allow certain savers to earn up to £18,570 in interest completely tax-free
Martin Lewis has shed light on a ‘seldom discussed’ savings tax allowance that could significantly benefit individuals with low incomes or those living off the interest of large sums. The finance guru, during his BBC podcast, explained that under certain conditions, people could earn £18,570 in savings interest without paying any tax.
Furthermore, he suggested that individuals could also invest their savings into Cash ISAs and Premium Bonds to avoid taxation on the interest earned.
For those with lower earnings or entirely reliant on interest from savings, Mr Lewis highlighted another tax allowance. He elaborated: “There is another savings allowance that is rarely spoken about. This is called the starting savings allowance. Now this is for low earners and it’s quite complicated.
“So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer, interest tax-free as a low earner. If you have earned income under £12,570, which is the standard tax allowance, you can earn £5,000 on top of that in savings in this starting savings allowance, in savings interest, which is untaxed. For every pound you earn above £12.570, you lose a pound of the £5,000.”
Mr Lewis illustrated this with an example: if you earned £13,570, you’d only receive £4,000 for your starting savings allowance. He continued: “For people where all of their money was generated by savings interest, they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest.
“And then you could have an ISA on top for £20,000 a year which would be tax free and you could put money into Premium Bonds, £50,000 of which would be tax free.”
Mr Lewis noted that some people describe the tax on savings as ‘double taxation’ and clarified: “Let’s be technical, it’s not – there are other things that are double taxation but you get taxed on the amount of money you earn on your income, and then you get taxed on the amount of money you earn on your savings. You do not get taxed on your savings.”
Regarding saving tax, the Money Saving Expert founder outlined that there were two key thresholds – £10,000 and £20,000 – that people needed to be aware of, depending on their earnings. Mr Lewis explained that one crucial figure was £12,570 because this represents the personal tax threshold for everyone: “The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don’t pay tax on – your normal standard tax-free personal allowance.
“In savings specifically you then have, if you’re a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don’t pay tax on. That’s £1,000 of interest, not £1,000 in a savings account.”
This means that with a decent savings account, people need to be mindful of how much money they have deposited – with standard rate taxpayers being safe with £20,000 in savings. Mr Lewis clarified: “So at 5 per cent interest as a basic rate taxpayer you can put £20,000 in a savings account and it would be tax free because that would generate £1,000 of interest.
“As a higher 40 per cent rate taxpayer, you’re allowed £500 of interest tax-free. So it would be £10,000 in there that would save you and you wouldn’t pay interest if you have in the top 5% savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don’t get one of these.”
To listen to the full podcast click here.
