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Brits are being urged to check out a little-known HMRC hack to earn £18,570 a year without having to pay any tax.
The UK income tax personal allowance is the amount you can earn from your work, pension, or savings interest that you do not have to pay income tax on. For most people, this has been frozen at £12,570 since April 2021 and is legislated to stay capped until at least April 2028.
Prime Minister Andy Burnham has hinted at raising this to ease the tax burden on working people at the next budget – but says that there is “no commitment at this point to change” it.
However, even if the threshold remains, those one low-income can get an additional tax-free allowance of up to £5,000 for their savings. This is known as the Starting Rate for Savings.
Am I eligible for the Starting Rate for Savings?
If your income from pension or work is under the personal allowance (£12,570), you are entitled to the full £5,000 tax-free boost. For every £1 you earn over the personal allowance, you lose £1 of the starting rate for savings.
This means you will not be eligible for the Starting Rate for Savings if your income from pension or work is £17,570 or more.
“This is designed for people who have low work earnings but high interest on savings, often people who are retired,” Martin Lewis said on his eponymously named ITV show The Martin Lewis Money Show Live back in March.
Alongside this, those who earn less than £50,270 a year can earn £1,000 in savings interest before paying any tax on it. This is known as the personal savings allowance (PSA) and can add onto your £5,000 starting savings rate.
For example, if you don’t earn any income from work or pensions but have £20,000 of savings income every year – you will only need to pay £286 in tax. This is substantially lower than the £1,484.20 in income tax you would have had to pay if these earnings came from work.
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The personal allowance covers the first £12,570 and the starting savings rate covers the next £5,000. The PSA covers the next £1,000, meaning that only £1,430 of savings income will be taxed at the basic 20 per cent rate.
I earn more than £100,000 a year. What am I eligible for?
Your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means you do not get a personal allowance if your income is £125,140 a year or above.
Those earning £100,000 will also not be eligible for the starting rate for savings or the PSA.
A Cash Individual Savings Account (ISA) allows those over the age of 18 to put aside £20,000 each year into an account where you’ll never pay tax on the interest. From next tax year, the allowance will fall to £12,000 – but over-65s will keep the £20,000 limit.
