Money Saving Expert Martin Lewis has issued an important warning for anyone in the UK with more than £10,000 in a savings account. Speaking on his BBC show with Adrian Chiles, he explained how tax on savings interest works, what allowances people have, and why savers should be careful — especially with rising interest rates.
If you are saving money, it’s essential to understand how much interest you can earn tax-free, and when you might start paying tax on savings interest. Here’s a simple breakdown of what Martin Lewis said and what it means for you.
Do You Pay Tax on Your Savings?
Many people think they are taxed on their savings balance, but that’s not true. Martin Lewis clarified that:
“You do not pay tax on the money you save, only on the interest earned from your savings.”
So, if you put £10,000 in a bank, the money itself is not taxed. But if that £10,000 earns interest, the interest might be taxed, depending on how much you earn in total and which tax bracket you are in.
Understanding Your Tax-Free Savings Allowances
1. Personal Allowance (£12,570)
Every UK resident gets a tax-free personal allowance of £12,570 per year. This applies to any income, including salary, pension, and savings interest.
If all your income (including savings interest) is below £12,570, you don’t pay any tax at all.
2. Personal Savings Allowance (PSA)
If you earn above £12,570, you still get a Personal Savings Allowance, which lets you earn some interest tax-free:
- Basic Rate Taxpayers (20%):
Can earn up to £1,000 in interest tax-free per year. - Higher Rate Taxpayers (40%):
Can earn up to £500 in interest tax-free per year. - Additional Rate Taxpayers (45%):
No savings allowance — all interest is taxed.
How Much Can You Save Without Paying Tax?
Martin Lewis explained that depending on interest rates, there is a limit to how much you can save before you start paying tax on interest.
Example for Basic Rate Taxpayers (20% tax bracket):
- If a savings account pays 5% interest, and your PSA is £1,000,
- You can save up to £20,000 tax-free, because 5% of £20,000 is £1,000.
“At 5% interest, a basic rate taxpayer can have £20,000 saved without paying tax on interest,” says Martin.
Example for Higher Rate Taxpayers (40% tax bracket):
- With a £500 PSA,
- At 5% interest, you can save up to £10,000 tax-free.
Special Savings Allowance for Low Earners — The Starting Savings Rate
Martin Lewis also highlighted a lesser-known allowance called the Starting Savings Rate.
Who is eligible?
- Low earners, who make less than £17,570 total income (this includes the £12,570 Personal Allowance + £5,000 Starting Savings Allowance).
How does it work?
- If your total income is under £12,570, you can earn up to £5,000 in interest tax-free.
- But, if you earn above £12,570, you lose £1 of the £5,000 allowance for every £1 earned.
Example:
If you earn £13,570, you will only get £4,000 as your starting savings allowance.
So, if you are a low earner, you might get up to £5,000 in interest tax-free — on top of your Personal Allowance.
Why You Should Check Your Savings Now
Martin Lewis warns that with interest rates on savings accounts now at 4-5% or higher, people with more than £10,000 or £20,000 saved could easily earn more interest than their tax-free allowances allow.
If this happens, HMRC will tax the interest above your allowance, and you may owe money at the end of the tax year.
Key Takeaways
If you have over £10,000 in savings, you should:
- Check how much interest you are earning.
- Know your tax bracket — Are you a basic, higher, or additional rate taxpayer?
- Use tax-free accounts like ISAs — Interest earned in ISAs (Individual Savings Accounts) is always tax-free, no matter how much you earn.
- Split savings with your partner if they have unused allowances.
- Speak to a financial advisor if unsure how this applies to you.
FAQ
Do I have to pay tax on my savings in the UK?
No, you do not pay tax on the money you save. You only pay tax on the interest you earn from your savings, depending on how much interest you make and your total income.
What is the Personal Savings Allowance (PSA)?
The Personal Savings Allowance (PSA) lets you earn some savings interest tax-free. Basic rate taxpayers can earn up to £1,000 interest tax-free, higher rate taxpayers up to £500, and additional rate taxpayers do not get a PSA.
How much savings can I have without paying tax on interest?
If your bank pays 5% interest, a basic rate taxpayer can save up to £20,000 before paying tax (since 5% of £20,000 is £1,000). Higher rate taxpayers can save up to £10,000 tax-free at 5% interest.
What is the Starting Savings Rate and who can benefit?
The Starting Savings Rate is an additional tax-free interest allowance of up to £5,000 for low earners whose total income is under £17,570. This amount reduces by £1 for every £1 earned over £12,570.
How can I avoid paying tax on my savings interest?
To avoid tax on savings interest, you can use tax-free ISAs, split savings with your partner if they have unused allowances, and keep your total interest earned within your allowed tax-free limits.
