The UK's tax authority, HM Revenue and Customs (HMRC), has effectively increased the personal tax-free allowance for low-income individuals to £18,570. This is achieved by combining the standard Personal Allowance of £12,570, the Starting Rate for Savings of up to £5,000, and the Personal Savings Allowance (PSA).
How the £18,570 Tax-Free Threshold Works
Under the rules introduced by the Labour Party government and HMRC, the 0% Starting Rate for Savings allows some savers to earn up to £5,000 in interest tax-free. This benefit is available to individuals whose non-savings income is less than £17,570. When added to the Personal Allowance, those with non-savings income of £12,570 or less can have a total tax-free income threshold of £18,570.
Over 15 million adults in the UK have incomes below the £12,570 Personal Allowance threshold, and approximately 392,000 taxpayers benefit from the Savers Rate.
Eligibility and Tapering
You can benefit from the Starting Rate for Savings if your non-savings income does not exceed £17,570. However, for every £1 earned above the Personal Allowance of £12,570, the £5,000 Starting Rate for Savings is reduced by £1. This means the tax-free allowance gradually decreases as income rises from £12,571 to £17,570.
While savings rates have peaked and are now declining, they remain high due to recent base rate increases. Understanding this rule is crucial for low-wage earners and retirees seeking to maximise their savings returns.
Expert Advice on Using Allowances
Chris Storey, savings expert and Chief Commercial Officer at Atom bank, said: "Most people think the tax-free limit stops at £1,000 of interest, but for the millions of retirees or those earning a lower income, the reality is much more generous. By reading up on how the Starting Rate for Savings is applied by HMRC, you might find that you’ve got more room to save and earn interest at a 0% tax rate than you previously thought."
Storey added: "We’ve published a really useful guide to help savers understand the various allowances and make the most of their savings interest before the end of the tax year. A powerful alternative worth considering is an ISA. These accounts offer a separate, generous tax-free contribution limit of £20,000 per tax year. An ISA can be great if your savings are approaching the limits of your allowances, as all interest earned within it is entirely tax-free for the lifetime of the product, protecting your wealth no matter how much you earn in the future."
Time-Sensitive Opportunity
With the tax year ending on April 5th, the window to utilise this year's allowances is closing fast. Savers are encouraged to review their income and savings interest to ensure they take full advantage of the tax-free thresholds before the deadline.
