HMRC Tax-Free Personal Allowance Increased to £18,570 for Eligible Households
In a significant development for personal finance, HMRC has raised the tax-free personal allowance to £18,570 for specific households across the United Kingdom. According to financial experts, individuals whose total annual earnings from income and savings combined fall below this threshold could benefit from tax-free interest on all their savings.
Understanding the Key Allowances
Martin Lewis, the renowned ITV financial commentator, has provided detailed explanations of how these allowances operate. He highlights three primary components that most people should be aware of regarding tax-free earnings.
The standard tax-free personal allowance remains at £12,570 per year for most individuals, covering earnings and savings interest that are exempt from taxation. This figure can vary based on individual circumstances and annual adjustments.
The personal savings allowance provides additional tax-free interest for taxpayers. Basic-rate taxpayers can earn up to £1,000 in savings interest tax-free annually, while higher-rate taxpayers have a £500 allowance. Both groups receive equivalent tax benefits of £200 through these allowances.
The Starting Savings Rate for Lower Earners
Lewis emphasizes a lesser-known provision called the starting savings rate, which can be particularly valuable for lower earners with substantial savings. This allowance permits up to £5,000 of extra savings interest to be earned tax-free, in addition to the standard personal allowance and personal savings allowance.
When combined, these allowances create a scenario where individuals could have £18,570 of combined earnings and savings interest completely tax-free. This calculation includes the standard £12,570 personal allowance, plus the £5,000 starting savings rate, and the £1,000 personal savings allowance for basic-rate taxpayers.
How Earnings Affect the Allowances
The system includes a reduction mechanism where for every pound earned above certain thresholds, individuals lose £1 of their starting savings allowance. For example, if someone earns £1,000 above the personal savings allowance, they would lose £1,000 of their starting savings allowance, reducing it to £4,000 tax-free.
This reduction continues progressively until earnings reach £17,570, at which point the entire starting savings allowance is eliminated. However, basic-rate taxpayers would retain their personal savings allowance throughout this process.
Practical Implications and Cash ISA Considerations
Lewis notes that this combination of allowances is particularly beneficial for lower earners with significant savings, often including pensioners who might have accumulated savings but have limited earned income.
Regarding cash ISAs, Lewis clarifies that interest earned within these accounts operates separately from the allowances discussed. Cash ISA interest doesn't count toward the personal savings allowance or starting savings rate limits, providing an additional layer of tax-free savings potential.
This means individuals could potentially have £18,570 of tax-free earnings and savings interest through the combined allowances, plus additional tax-free interest from cash ISAs, creating substantial opportunities for tax-efficient savings management.
