HMRC is increasing the Personal Tax-Free Allowance to £18,570 for some individuals. This is achieved by combining the personal allowance before income tax (£12,570), the starting rate for savings (up to £5,000), and the personal savings allowance (£1,000).
Martin Lewis Explains the Change
Money Saving Expert Martin Lewis, from BBC and ITV, provides an example of Chris, a 52-year-old earning £14,500 from work and £2,500 in savings income. Lewis's team at MSE highlights three key components.
Personal Allowance
The standard tax-free personal allowance is £12,570 per year, which varies based on earnings and savings interest.
Personal Savings Allowance
Basic-rate taxpayers can earn £1,000 in savings interest tax-free, while higher-rate taxpayers can earn £500. This provides a £200 benefit for both: 20% of £1,000 and 40% of £500.
To earn £1,000 in interest at 4.75%, a basic-rate taxpayer would need about £21,000 in savings. A higher-rate taxpayer would need £10,500 to earn £500. If you have substantially less, a cash ISA may not be necessary.
Starting Savings Rate
For lower earners, the starting savings rate allows up to £5,000 of additional interest tax-free. For example, someone with £6,000 in savings interest would have it all tax-free if their total income is within the personal allowance. Adding earnings of £7,570 brings total tax-free income to £12,570.
If earnings use up the personal allowance, the starting savings rate provides £5,000 tax-free on savings interest, plus the personal savings allowance of £1,000, totaling £6,000. This means combined earnings and savings interest of £18,570 can be entirely tax-free.
However, for every £1 earned above the personal allowance, £1 of the starting savings allowance is lost. For example, earning £1,000 above reduces the starting savings allowance to £4,000. At earnings of £17,570, the starting savings allowance is fully lost, but the personal savings allowance remains for basic-rate taxpayers.
The starting savings rate primarily benefits lower earners with substantial savings, such as pensioners.
Cash ISAs
Interest earned in cash ISAs is separate from these allowances and does not count towards them. This provides an extra tax-free allowance if needed. Thus, you could have £18,570 tax-free from earnings and savings interest, plus additional cash ISA interest.
