Money saving expert founder Martin Lewis has spoken about how people can avoid paying out tax if they have more than £10,000 savings. The personal finance expert spoke out about the pitfalls of savings and how people can inadvertently end up paying tax to HMRC on the money they’ve got stashed away.
In a post on X the personal finance guru said anyone earning between £12,500 and £50,000 a year could fall foul of the personal savings allowance limit. He said that people in this income tax bracket would start incurring tax on their savings interest if they have more than £20,000 in the account.
He added that if someone is on the 40 per cent tax rate – earning from £50,000 up to £125,000 then they would start paying tax on £10,000 savings. But Mr Lewis explained that there were things people can do to legally avoid paying tax on the interest.
He said: “How do you protect yourself from that tax? Well, the biggest scheme and the most obvious one is a cash ISA, an individual savings account. A cash ISA is simply a savings account you don’t pay tax on. You can put £20,000 in per tax year.
“Tax year starts on the 6th of April, ends on the 5th of April. Once you put the money inside a cash ISA, it’s protected from tax.”
There are a number of ISA options, Mr Lewis explained, with some easy access where people can add and take out money, and others where it’s fixed. He added: “They’re basically it’s just a savings account in a special tax wrapper that you don’t pay tax on. Now the important thing about a cash ISA is you can put your money in, it’s then protected from tax, so money in there, you don’t pay tax on it and it doesn’t count towards the interest in the personal savings allowance, this is on top of that.
“As long as it stays inside the cash ISA, you could put £20,000 in this year. Well, let’s say you can then put £20,000 in the next tax year, so that’s £40,000. And then in the next tax year, so that’s £60,000, so if you are lucky enough to be able to max it out each year, you could protect more and more and more of your savings inside the cash ISA without having to pay tax on it. So for those who’ve got a good whack of savings, it’s very worthwhile to look at a cash ISA because, well, as a 20% rate taxpayer, you’ll be 20% of your interest would be taken away in tax if you’re above the personal savings allowance.
“It won’t in the cash ISA. Higher rate or top rate taxpayer, that’s 40% of your interest or 45% of your interest that will be taken away. It won’t be in the cash ISA. The other thing that you can look at that’s very easy to do is premium bonds. The prizes that you earn from premium bonds, premium bonds are where you put your money away, the money you put in is safe, but you then get paid interest depending on a prize draw.”
Explaining how people pay tax he explained that people who already pay tax will also get taxed on their savings interest if it goes above a certain level. He said: “Talking about those people who are generally paying tax, the most important thing to understand is you will probably have a personal savings allowance. This is a special amount of savings interest that you can earn each year, which isn’t taxed. Now if you’re a basic rate taxpayer, a 20% rate taxpayer, which is generally someone earning between about £12,500 and £50,000 a year, then your personal savings allowance is £1,000.
“That means you can earn £1000 of interest from any legitimate UK sources and you do not have to pay tax on it.” Mr Lewis said that currently the top paying easy access account gives about 5 per cent interest. He added: “So how much would you have to have in there to earn a grand’s worth of interest? About £20,000.
“So if you’ve got £20,000 or less in savings and you’re a basic rate taxpayer, it is very unlikely that your savings interest would be taxed, so you don’t have to pay anything so you can get on with it.
“If you’re a higher 40% rate taxpayer, which is someone earning over around £50,000 up to about £125,000, then your personal savings allowance is £500 a year.”
Mr Lewis explained that in a top easy access account it means £10,000 in savings would incur the tax. He added: “If you are a top rate taxpayer, so earning over £125,000 a year, you do not get a personal savings allowance. So all of your savings interest is taxed.”
