Starting rate for savings: could you get an extra £5,000 savings allowance?

You can get thousands of pounds in tax-free savings interest if you’re a lower-earner

Most people get a Personal Savings Allowance of between £500 and £1,000, but did you know you might also be entitled to another one?

The starting rate for savings is a separate allowance for lower-earners that means you can earn much more in savings income without paying tax. 

Here’s how it works.

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What is the starting rate for savings?

In a nutshell, the starting rate for savings is a savings allowance that allows you to earn up to £5,000 in interest without paying tax.

You’ll need to be a lower-earner to get it though  – and there are a few other things to be aware of, which I’ll explain as we go.

But essentially, if you earn less than £12,570 in income, which is your entire Personal Allowance, you can also earn £5,000 in savings interest, tax-free.

But that’s not all. 

How the starting rate for savings works with other allowances

Every tax year, you get a number of allowances before you need to pay tax.

These include:

• A £12,570 Personal Allowance for all income. This is how much you can earn before paying tax
• A £5,000 starting rate for saving allowance. This is how much you can earn in savings interest before paying tax if you’re within your Personal Allowance. 
• A Personal Savings Allowance (PSA), also for savings interest. If you’re not earning above the Personal Allowance, you get the same PSA as a basic rate taxpayer – so you get the full £1,000 annual allowance. 

This means in total, you can earn as much as £18,570 in combined savings interest and income, tax-free. 

Now these allowances won’t benefit everyone – after all, if you’re not earning much, you may not be saving much either. 

However, if you’ve got a lower income, for example a pension, and a decent chunk of savings, these combined allowances will be really useful.

What if I earn more than £12,570?

If you earn more than your Personal Allowance – from work or anything else other than savings interest – you’ll start to lose your starting rate for savings. 

It goes down by £1 for every additional £1 you earn. So, say you earn £13,570 in this tax year, your starting rate for savings will reduce to £4,000. 

And if you earned £17,570, you’d lose your entire starting rate for savings.

However, in both of these cases, as you’re still a basic rate taxpayer, you’d still be entitled to the full £1,000 Personal Savings Allowance.

If we look at other examples, say you earn £16,000 from your job and get £200 interest on your savings. 

The first £12,570 of your salary takes you over your Personal Allowance. And the leftover £3,430 of your work earnings will eat into your starting rate for savings. So instead of getting a £5,000 allowance, it’ll be reduced by £3,430 leaving you with £1,570.

Your £200 in savings interest won’t be taxed, as it’s well within your starting rate for savings, and that’s before you’ve even considered your £1,000 Personal Savings Allowance. 

If you didn’t have any income at all, you’d have to have a significant savings pot to breach your combined allowances. I

n fact, if you had an account that paid 4% you could have savings of £150,000, yielding £6,000 of interest, and it would still be tax-free.

What types of interest do my allowances cover?

Your allowances will cover a number of different interest scenarios from different types of providers, including:

• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts

Other ways to earn tax-free interest

If you aren’t eligible for the starting rate for savings, you can still avoid tax on most of the interest you earn.

For a start, there’s that Personal Savings Allowance. 

If you earn under £50,270 a year, you can earn £1,000 in savings interest a year without paying tax.

And if you’re a higher rate taxpayer, so earn between £50,271 and £125,140, you get an allowance of £500.

If you exceed these allowances you’ll pay your usual rate of tax on your savings interest. You don’t get a Personal Savings Allowance if you’re an additional rate taxpayer.

For many people, the Personal Savings Allowance will be enough to keep your earnings tax-free.

For example, if you had a savings account that paid 5%, you’d earn £1,000 interest on a pot of £20,000 – so you’d be ok if you’re a basic rate taxpayer, if these were your only savings. For a higher rate taxpayer, you’d be within your allowance if you had £10,000 saved.

Of course, you might be getting a lower rate – so you’d have room for bigger savings. If you were earning 4%, you could save £25,000 as a basic rate taxpayer or £12,500 as a higher rate taxpayer. 

And at 3% you could save around £33,300 on a basic rate or just under £16,700 if you’re in the higher tax bracket, and be within your Personal Savings Allowance.

But if you’re worried about exceeding this allowance, which is more likely as a higher rate tax payer, an ISA is worth considering.

You can pay in up to £20,000 into ISAs each tax year and anything you earn is tax-free. Plus, any interest or gains don’t count towards your allowances either.

We regularly update the top Cash ISAs, Stocks & Shares ISAs and Lifetime ISAs, in our best buy tables. 

You can also earn tax-free prizes via Premium Bonds, though you’re not guaranteed to get anything each month.

How do I pay tax on savings interest?

If you exceed your allowances, there are a number of ways you could pay the tax on your savings interest.

If you’re employed (and getting paid via PAYE) or receiving a pension, HMRC will usually take the tax owed by changing your tax code. 

Or if you earn more than £10,000 from your savings and investments, you’ll need to complete a self-assessment tax return. If you do this anyway, you can report your savings and investment income as part of your usual return.

We’ve got more information on how to pay tax on your savings interest on the website.