Households are being urged to check if they could earn up to £18,570 tax-free through a Personal Allowance loophole provided by HMRC.
This will be available again from Monday, April 6 in the new tax year. Normally, anyone who works can earn up to £12,570 without paying Income Tax—this is the Personal Allowance. However, a loophole known as the Starting Rate for Savings can help increase this limit to £18,570.
What is the Starting Rate for Savings?
The Starting Rate for Savings boosts your tax-free allowance by providing an additional savings interest allowance. If you earn less than £12,570 from work or your pension, you can claim up to £5,000 in savings interest without paying tax. This means you could earn up to £5,000 in interest from savings accounts tax-free.
Key Points to Know About the Starting Rate for Savings
- Earn up to £5,000 in savings interest without paying tax if your total income is less than £12,570.
- If you earn between £12,570 and £18,570, you can still benefit, but the savings allowance reduces as you exceed the Personal Allowance.
- Additional tax-free savings interest is available through the Personal Savings Allowance (£1,000 for basic rate taxpayers).
- Households can combine the Personal Allowance, the Starting Rate for Savings, and the Personal Savings Allowance to earn up to £18,570 tax-free.
- People who earn over £12,570 lose £1 of the savings allowance for every £1 earned above this threshold.
Example: Cheryl’s Tax-Free Savings Calculation
Income Source | Amount |
Personal Allowance (up to £12,570) | £12,570 |
Starting Savings Rate (up to £5,000) | £5,000 |
Personal Savings Allowance (£1,000) | £1,000 |
Taxable Income (after allowances) | £1,430 |
Tax Payable (at 20% rate) | £286 |
How HMRC Reduces Your Starting Rate for Savings
If you earn over £12,570, the Starting Rate for Savings is gradually reduced. For instance, if your income exceeds £12,570, HMRC will reduce the £5,000 allowance by £1 for each £1 of income above that limit. So, if you earn £16,000 in wages and have £200 in savings interest, your Starting Rate for Savings would be reduced by the extra £3,430 earned from wages, leaving you with £1,570 available in tax-free savings interest.
Reclaiming Tax on Savings Income
If you’ve already paid tax on your savings income, you can reclaim it through a Self Assessment Tax Return. Claims can be backdated for up to four tax years, but from Monday, April 6, the 2021-22 tax year will no longer be claimable for backdating. Therefore, make sure to file your claim as soon as possible if you qualify for a refund.