Martin Lewis explained how people can use ‘little known’ ways of avoiding savings tax (Image: ITV)
Martin Lewis has spoken about a ‘rarely spoken about’ savings tax allowance which could have a massive impact on people on low earnings and also those living of the interest of lump sums.
The financial expert, speaking on his in certain circumstances could earn £18,570 in savings interest tax free.
And he said on top of that people could also put savings into Cash ISAs and to also avoid paying tax on the interest.
He explained for low earners – or people entirely living off interest from savings there is another tax allowance. Mr Lewis 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. “
Mr Lewis explained it through an example of if you earned £13,570 you’d only get £4,000 for your starting savings allowance. He added: “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.
Don’t miss…
“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 , £50,000 of which would be tax free.”
Mr Lewis said some people describe the tax on savings as ‘double taxation’ and added: “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.”
In terms of saving tax the Money Saving Expert founder explained that there were two thresholds – of £10,000 and £20,000 that people needed to be aware of depending on how much they earn.
Mr Lewis said that one key figure was £12,570 because this is the personal tax threshold for everyone: “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.”
Don’t miss…
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.
“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% 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,” Mr Lewis explained.
To listen to the full .