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6% savings rates drag millions into HMRC net – this £5,000 tax break could set you free | Personal Finance | Finance
The UK’s tax system is incredibly complicated and never more so than when it comes to taxing the interest on your savings. This can make it incredibly hard to work out what you owe to HMRC.
This wasn’t much of an issue when savers got almost no interest but it matters today when savers get can as much as 6.15 percent.
Rising interest rates are good news because they boost the returns on savings, said Lucinda O’Brien, savings account expert at Money.co.uk. “However, this also means you could pay tax on your money.”
Millions now face a shock tax bill after exceeding their personal savings allowance (PSA), introduced in 2016 to allow savers to take a chunk of interest tax-free each year. Many will have forgotten all about it until HMRC came knocking.
Lower earners, particularly pensioners, may benefit from another tax break called the starting rate for savings.
This is even more complicated than the PSA and many struggle to work out how it affects them, said Andrew Hagger, banking expert at MoneyComms. “Things get even messier when the PSA and starting rate for savings overlap.”
Under the PSA, launched in 2016, 20 percent taxpayers can earn £1,000 savings interest free of income tax, while 40 percent taxpayers can earn £500. Additional rate 45 percent taxpayers do not get the PSA.
When savings rates hovered around one percent, a basic rate taxpayer could have £100,000 in the bank before breaching the PSA.
If they get six percent today, they would exceed it with £16,667. That falls to just £8,333 for a higher rate taxpayer, O’Brien said. “However, those on lower incomes could get further tax-free interest thanks to the starter rate for savings.”
The starting rate for savings, launched in 2015, makes the PSA seem like a model of simplicity, said Anna Bowes, founder of savings rate tracking service Savings Champion. “It allows savers to earn up to £5,000 of interest free of tax, but whether they qualify will depend on their income from all sources.”
Banks and building societies pay savings interest gross, without tax being taken off. HMRC then calculates how much they owe after applying both the PSA and starting rate.
Everybody gets a personal allowance, allowing them to earn up to £12,570 each year tax free. For those who qualify, the Blind Person’s Allowance lifts that by £2,870 to £15,440.
This applies to earnings from all sources, including work, state and private pensions, interest and dividends from savings and investments outside of the tax-free Isa wrapper, and any rental property.
If you earn more than £17,570 from non-savings sources you will not be eligible for the starting rate for savers.
However, you will still benefit from the £1,000 PSA, which falls to £500 if your income exceeds the £50,270 higher-rate tax threshold. If your earnings exceed the £125,140 additional rate threshold the PSA vanishes, too.
For lower earners, things get seriously complicated, Bowes said. “If your non-savings income is less than £17,570 the starting rate should apply but you may not get the full £5,000. Every pound of earnings above the £12,570 personal allowance reduces it by £1.”
READ MORE: Top savings accounts pulled as rates peak. This 6.10% deal may not last
So if you earn £18,000 the starting rate does not apply but you can still take up to £1,000 of interest tax-free under the PSA.
Say your non-savings income totals £15,000. This is £2,430 above the personal allowance and cuts your starting rate to £2,570.
If you earn, say, £500 in savings interest, there’s no tax to pay. If you earn £3,000, though, £430 of that will fall above your starting rate for savings. However, the £1,000 basic rate PSA then kicks in, so there is still no tax to pay.
However, if your savings interest totalled £5,000, it would exceed both your £2,570 starting rate and £1,000 PSA. In that case, £1,430 of interest would be taxable at 20 percent, costing £286.
If you earn less than £12,570 then you get both the full starting rate and £1,000 PSA on any savings interest.
Where possible, tax owed will be collected via your tax code, but higher-rate taxpayers may have to complete a self-assessment return.
Both the PSA and starting rate having been frozen since launch, drawing more into HMRC’s tax net over time through fiscal drag. If you risk getting caught, consider popping savings inside your £20,000 tax-free Isa wrapper or using tax-free options such as Premium Bonds.
New Delhi:
Sensex jumped past 1,000 points today after trading flat till noon. Nifty too soared by rising over 1.5 per cent and breached 25,000 for the first time since October 17 in 2024.
Sensex was up 1,260.14 points at 1:55 pm while Nifty was up 396.55 points at 25,063.45.
Sensex and Nifty declined in early trade in the morning, dragged down by blue-chip bank stocks and weak trends in Asian markets.
The 30-share BSE benchmark gauge Sensex declined 106.78 points to 81,223.78 in early trade. The NSE Nifty dipped 38.45 points to 24,628.45.
Later, the BSE benchmark traded 247.22 points lower at 81,082.80, and the Nifty quoted 67.15 points down at 24,599.75.
From the Sensex firms, Power Grid, IndusInd Bank, Axis Bank, Sun Pharma, Infosys, Mahindra & Mahindra, Kotak Mahindra Bank and HDFC Bank were the major laggards.
Tata Motors, Adani Ports, Tata Steel, Tech Mahindra and UltraTech Cement were the gainers.
In Asian markets, South Korea’s Kospi, Japan’s Nikkei 225 index, Shanghai’s SSE Composite index and Hong Kong’s Hang Seng were trading lower.
US markets ended on a mixed note on Wednesday.
Global oil benchmark Brent crude dropped 2.10 per cent to USD 64.70 a barrel.
Foreign Institutional Investors (FIIs) bought equities worth Rs 931.80 crore on Wednesday, according to exchange data.
On Wednesday, the BSE Sensex climbed 182.34 points or 0.22 per cent to settle at 81,330.56. The Nifty rose by 88.55 points or 0.36 per cent to 24,666.90.
Mumbai:
Equity benchmark indices Sensex and Nifty rebounded in early trade on Wednesday as retail inflation eased to a nearly six-year low of 3.16 per cent in April, creating enough room for the Reserve Bank to go for another round of rate cut in the June monetary policy review.
Also, a cooling US April inflation data added to the positive trend in the equity markets.
The 30-share BSE benchmark gauge Sensex climbed 281.43 points to 81,429.65 in early trade. The NSE Nifty went up by 96.65 points to 24,675.
From the Sensex firms, Tata Steel, Bharti Airtel, Eternal, Tech Mahindra, Infosys, Mahindra & Mahindra, Bajaj Finserv and Reliance Industries were the major gainers.
Telecom operator Bharti Airtel climbed over 2 per cent after it posted about a five-fold jump in consolidated net profit to Rs 11,022 crore in the March 2025 quarter, mainly due to the tariff hike impact and one-time gain on tax benefits.
However, Tata Motors, Asian Paints, Nestle and IndusInd Bank were among the laggards.
Tata Motors dipped over 1 per cent after the firm reported a 51 per cent decline in consolidated net profit to Rs 8,556 crore for the March quarter, hit by lower volumes and operating leverage.
“A strong tailwind for the Indian market is the sharp dip in April CPI inflation to 3.16 per cent. This leaves enough room for the MPC to cut rates thrice more in this cutting cycle. This is positive for the market in general and rate sensitives in particular,” VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said.
Retail inflation eased to a nearly six-year low of 3.16 per cent in April mainly due to subdued prices of vegetables, fruits, pulses, and other protein-rich items, creating enough room for the Reserve Bank to go for another round of rate cut in the June monetary policy review.
The Consumer Price Index (CPI) based inflation was 3.34 per cent in March and 4.83 per cent in April 2024. It was 3.15 per cent in July 2019.
“These developments (India, US inflation data) are likely to boost investor sentiment. In addition, easing trade tensions between the US and China, as well as a reduction in geopolitical frictions between India and Pakistan, are supportive of a favorable market environment,” Vikas Jain, Head of Research at Reliance Securities, said in his pre-open market quote.
In Asian markets, South Korea’s Kospi, Shanghai’s SSE Composite index and Hong Kong’s Hang Seng were trading higher while Japan’s Nikkei 225 index quoted lower.
US markets ended mostly higher on Tuesday.
Global oil benchmark Brent crude dipped 0.57 per cent to USD 66.25 a barrel.
Foreign Institutional Investors (FIIs) offloaded equities worth Rs 476.86 crore on Tuesday, according to exchange data.
On Tuesday, the Sensex tanked 1,281.68 points or 1.55 per cent to settle at 81,148.22. The broader Nifty of NSE dropped 346.35 points or 1.39 per cent to 24,578.35.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
New Delhi:
Wholesale price inflation dropped to 0.85 per cent in April as prices of food articles, manufactured products, and fuel eased, government data showed on Wednesday.
WPI-based inflation was 2.05 per cent in March. It was 1.19 per cent in April last year. ” Positive rate of inflation in April, 2025 is primarily due to an increase in prices of manufacture of food products, other manufacturing, chemicals and chemical products, manufacture of other transport equipment and manufacture of machinery and equipment, etc,” the industry ministry said in a statement.
As per the WPI (Wholesale price index ) data, food articles saw a deflation of 0.86 per cent in April from an inflation of 1.57 per cent in March, with vegetables seeing a sharp drop. Deflation in vegetables was 18.26 per cent during April compared to deflation of 15.88 per cent in March. In onion, inflation eased to 0.20 per cent in April, as against 26.65 per cent in March.
Manufactured products, however, saw inflation at 2.62 per cent in April, compared to 3.07 per cent in March.
Fuel and power too saw a deflation of 2.18 per cent in April, compared to 0.20 per cent in March.
The RBI mainly takes into account retail inflation while formulating monetary policy. Data released on Tuesday showed, retail inflation eased to 3.16 per cent in April mainly due subdued prices of vegetables, fruits, pulses, and other protein-rich items. This is the lowest level of inflation since July 2019.
Easing of inflation would create enough room for the Reserve Bank to go in for another round of rate cut in the June monetary policy review.
In April, the RBI cut the benchmark policy rate by 0.25 per cent to 6 per cent. This is the second cut during the year to stimulate the economy, facing the threat of US reciprocal tariffs. The RBI sees retail inflation averaging 4 per cent in the current fiscal from the previous estimate of 4.2 per cent.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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