Money man Martin Lewis has sent a vital reminder to those stashing away the pennies in savings accounts. Martin, the man behind Money Saving Expert, stressed on his BBC podcast that the way your savings are taxed is widely misunderstood.
He explained that it’s not your hard-saved cash you pay tax on, but the interest. He also pointed out how tax relief works on accumulated savings and explained the two key thresholds when it comes to paying tax on the money you’ve set aside. The important numbers, depending on your income, are £10,000 or £20,000.
Radio host Adrian Chiles expressed the exasperation shared by many listeners with a common scenario: “Christina’s fed up – she’s sick of working hard getting taxed on income and then taxed on savings. How does that work? So frustrating.”
Martin responded with a clarification to ease the annoyance: “Well, forgive me, you are not taxed on savings. You do not pay tax on your savings.
“You pay tax on the interest earned on savings. And I know it is a fine difference but it is an important one.
“You put money in the bank or building society or wherever you do in a deposit savings account and you do not pay any tax on the money you put in, you only pay tax on the money you’ve earned. This is because it is treated like any other form of income although it does have special allowances and it’s really important to actually focus on what those special allowances are.”
Martin has been sharing his savvy tax-free savings tips with the public, reports the Express, emphasising the importance of the tax-free allowance. He explained: “The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don’t pay tax on – your normal standard tax-free personal allowance.
“In savings specifically you then have, if you’re a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don’t pay tax on. That’s £1,000 of interest, not £1,000 in a savings account.
“What it means is that in a good savings account people need to be wary of how much money is in there – with normal rate taxpayers being fine with £20,000 in savings. So at 5 per cent interest as a basic rate taxpayer you can put £20,000 in a savings account and it would be tax free because that would generate £1,000 of interest.”
For higher earners, Martin explained that tax relief has limitations. He said: “As a higher 40 per cent rate taxpayer, you’re allowed £500 of interest tax-free.
“So it would be £10,000 in there that would save you and you wouldn’t pay interest if you have in the top 5 per cent savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don’t get one of these.”
Martin highlighted a lesser-known savings allowance for those who earn lower incomes or only live off their savings interest. He explained: “There is another savings allowance that is rarely spoken about.
“This is called the starting savings allowance. Now this is for low earners and it’s quite complicated.
“So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer of interest tax free as a low earner. If you have earned income under £12,570, which is the standard tax allowance, you can earn £5,000 on top of that in savings in this starting savings allowance in savings interest, which is untaxed.
“For every pound you earn above £12,570 you lose a pound of the £5,000. If you earned £13,570 you’d only get £4,000 for your starting savings allowance.
“For people where all of their money was generated by savings interest they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest. And then you could have an ISA on top for £20,000 a year, which would be tax-free, and you could put money into Premium Bonds, £50,000 of which would be tax-free.”
Mr Lewis has also addressed the common misunderstanding regarding ‘double taxation’ on savings, clarifying: “Let’s be technical, it’s not – there are other things that are double taxation but you get taxed on the amount of money you earn on your income, and then you get taxed on the amount of money you earn on your savings. You do not get taxed on your savings.”