🔔 #AskAnna: What tax free savings allowances do I have?

Author: Anna Bowes
27th June 2024

Q: I am not working or drawing a pension (either private or state), and therefore have no income to speak of. However, I do have some cash that I would like to put into a savings bond. Can I offset the interest against my Personal Allowance in addition to the Personal Savings Allowance?

Anna says;

Most people can earn some interest on their cash savings, without paying tax.

The annual allowances available before you have to pay tax include;

·       Your Personal Allowance

·       The Starting Rate for Savings

·       Your Personal Savings Allowance

However, you may or may not be eligible for these allowances, depending on your 'other income' – so income other than your savings interest, such as wages, pension or rental income.

Although this has been frozen for some time, the Personal Allowance is £12,570. This is the amount of income you can receive before you may have to start to pay tax.

If your ‘other income’ is less than £17,570 a year, you should qualify for the Starting Rate for Savings, the maximum of which is £5,000. Every £1 of income you receive above the Personal Allowance of £12,570, will see this Starting Rate reduce by £1.

Finally, once you have used both of these allowances, if applicable, you could use the Personal Savings Allowance (PSA), which is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers do not have a PSA.

It’s pretty complicated, so here are a couple of examples that could help, especially if your circumstances change.

Example 1 – John

  • Other Income - £0
  • Savings Income - £13,000 gross
  • TOTAL INCOME = £13,000

In this example, whilst John’s savings income is greater than the Personal Allowance of £12,570, as he has no ‘other income’ he still qualifies for the maximum Starting Rate for Savings allowance of £5,000. So, the excess savings interest of £430 (£13,000 minus £12,570) fits comfortably into this allowance. So, there is no tax to pay.

If, however, his savings interest was much higher – say £25,000, it’s a little more complex.

He would first utilise his Personal Allowance of £12,570 – this would leave £12,430 that could be taxable.

But as his ‘other income’ is £0, he has the full Starting Rate for Savings allowance of £5,000. £12,430 minus £5,000 leaves £7,430 that could be taxable.

At this point, John still has his Personal Savings Allowance of £1,000 as he is a basic rate taxpayer. So, he will pay no tax on a further £1,000.

This would leave £6,430 of savings interest that is taxable.

Here’s another example for someone who does have some ‘other income’ In this case a pension income of £15,000

Example 2 – Sarah

  • £15,000 Pension Income
  • £ 6,200 Savings Income
  • £21,200 TOTAL INCOME

First – deal with the OTHER income…

£15,000 pension income, minus the Personal Allowance of £12,570 = £2,430.

Next take the excess of ‘income minus Personal Allowance’ from the £5,000 starting rate for savings nil rate band. Although Sarah can still utilise the allowance because her OTHER income is less than £17,570, it is £2,430 over the Personal Allowance so that is deducted from the maximum Starting Rate for Savers.

£5,000 minus £2,430 = £2,570 of the Starting Rate for Savings allowance still left to use.

Now deal with the savings income of £6,200.

£2,570 @ 0% (as it uses the Starting Rate for Savings allowance) means there is £3,630 left

Now Sarah can use the PSA of £1,000 (as she is a Basic Rate Taxpayer)

Therefore £2,630 would be taxable.

Please note that I am not a tax expert and this information is for guidance only. Tax can be very complex so you should contact a tax adviser or HMRC to clarify your personal situation.