HMRC has issued an update about how a tax applies to pensioners. The update comes as the rates you pay will soon be increasing.
A person reached out to the tax authority over social media to ask for clarity on how the rules work. They asked: “Can you confirm that a pensioner does not have to pay tax on the first £1,000 of interest earned on savings.”
In line with the personal savings allowance, a person on the basic rate for income tax can earn up to £1,000 in interest from their savings accounts each tax year with no tax to pay on this. The allowance is reduced if you are on the higher rate, down to £500, while those on the additional rate get no allowance and have to pay tax on any interest earnings they accrue.
This is different from any savings you build up in cash ISAs, as any interest earnings here are entirely tax-free. Likewise if you hold stock and shares in an ISA wrapper, you don’t have to pay any tax on your investment growth.
Tax rules explained
In response to the question, HMRC said: “Pensioners have the same rules as everyone else. So if they are a basic rate taxpayer only, then yes they have a £1,000 tax-free allowance.”
The rate you pay on any taxable interest is in line with your income tax rate, so you pay 20 per cent at if you are on the basic rate, 40 per cent if you are on the higher rate and 45 per cent if you are an additional rate taxpayer.
However, it’s worth noting that the rules are changing here very soon. From April 2027, the rate you pay on your interest earnings will go up by two percentage points. This means for those on the basic rate, it will move up to 22 per cent.
For higher rate taxpayers, the rate will increase to 42 per cent, while people on the additional rate will habe to pay 47 per cent. Some other changes are coming in from April 2027 which could increase the tax you pay on your savings.
ISA allowance changes
The ISA allowance is being effectively trimmed. Currently, you can deposit £20,000 into ISAs and split this as you choose between cash ISAs and stocks and shares ISAs.
But the new rules will mean you can only use up to £12,000 of the allowance as you decide. The other £8,000 will have to be used for stocks and shares ISAs.
However, many older savers will avoid these new rules. People aged 65 and over will retain the current £20,000 allowance.