In a significant development aimed at providing financial relief, HMRC is set to raise the tax-free Personal Allowance to £18,570 for certain UK households. This move could allow workers who earned less than £18,570 in a year to increase their tax-free allowance to nearly £19,000, offering a major boost amid the ongoing cost-of-living crisis.
Understanding the Starting Rate for Savings
The Starting Rate for Savings plays a crucial role in enhancing your tax-free allowance by leveraging a boosted savings interest allowance. If your annual income from work or pension is below £12,570, you are eligible for the full £5,000 allowance. This means you can earn up to £5,000 in interest from savings accounts without paying any tax on it.
Additional Benefits from Personal Savings Allowance
On top of that, you can add another £1,000 from the standard Personal Savings Allowance, allowing you to earn an additional £1,000 of savings interest tax-free. This combination of allowances creates a substantial tax shield for low-income earners.
Expert Insights from Martin Lewis
BBC Sounds podcast host 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."
Real-World Example from Money Saving Expert
ITV star Martin Lewis' website, Money Saving Expert, provides a clear example to illustrate this. It states, "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.
This policy change underscores HMRC's efforts to support low-income households by maximizing tax-free earnings through strategic allowance combinations, providing much-needed financial respite during challenging economic times.
