It’s important to make the most of the allowances you have (Image: Getty Images)
Brits could earn up to £18,750 without paying tax on the amount due to a Personal Allowance loophole from HMRC. Usually, anyone who works can only earn £12,570 without paying Income Tax on it – the Personal Allowance. The amount has been frozen since 2021 but it was recently extended for three years until 2031.
However, the freeze is now set to last a decade, and a huge amount of people are facing higher tax bills as wages go up each year (in theory). This means that more people will be dragged up into the higher up the thresholds for Income Tax.
Money Saving Expert, Martin Lewis, has shared how you can make the most of your allowances (Image: Getty Images)
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If you earned under £18,570 in a year, you could boost your tax-free allowance all the way to that number using a HMRC loophole known as the Starting Rate for Savings.
Starting Rate for Savings allows people to add another £5,000 to their tax-free allowance for savings interest income.
If you earn less than £12,570 from work or your pension, you can get the full £5,000 allowance, which means you’re allowed to earn up to £5,000 in interest without paying a penny of tax on it.
You can then add another £1,000 on top from the standard Personal Savings Allowance, which means you can earn another £1,000 of savings interest without paying tax on that either.
Money expert Martin Lewis explains: “If you earn less than £18,570 a year from earned income and savings combined, then all your interest from those savings could be tax-free.
“That’s because you get your personal allowance before you start to pay income tax (£12,570), plus the starting rate for savings (up to £5,000) and the personal savings allowance (£1,000) all in combination.”
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HMRC has explained how the allowances work (Image: Getty Images)
Those who earn over £12,570 lose £1 of their starting savings rate allowance for every £1 over the threshold.
HMRC explains: “You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
“The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
“You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
“Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.”
HMRC gives the example: “You earn £16,000 of wages and get £200 interest on your savings.
“Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.
“The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.
“Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest.”
Depending on your income and savings, the savings interest is mostly covered by a combination of allowances. These include:
Starting savings rate – the next £5,000 is tax-free, so now £17,570 of the interest income is taxed at 0%
Personal savings allowance – means the next £1,000 is tax-free, so £18,570 is taxed at 0%.
If you already have paid tax on your savings income, you can reclaim it via Self Assessment Tax Return and can backdate your claim for any of the past four years.