Money expert Martin Lewis has revealed two fully legal methods for shielding yourself from paying tax on your savings.
HMRC automatically gives a Personal Savings Allowance to everyone who works and pays Income Tax, so those earning more than £12,570 a year.
This is the amount you can make via interest on your savings accounts, paid to you by your bank, in a given tax year.
Those who earn less than £50,270 can earn £1,000 in savings interest before they owe tax, but those earning above that can only earn £500, and those earning £125,000 or more must pay tax on every penny of their savings.
And with many savings accounts offering as much as 5% interest right now, it is easy to go over the limit with just £10,000 to £20,000 of savings, depending on your income.
That’s why Martin Lewis has told his followers about two fully legal methods to avoid tax on savings interest.
Martin said that if you file a tax return through the HMRC self assessment tax return system, which you have to do if HMRC asks you to, then you simply put the total amount of interest you earned in your tax return.
But those who don’t normally need to submit tax returns, ie those with normal PAYE jobs, then as long as you’re earning less than £10,000 off of savings interest a year, you don’t have to do anything because the banks automatically send the information to HMRC so it can alter your tax code to change what you pay.
But if you want to avoid paying the tax, Martin then explained that you can use a cash ISA to legally protect yourself from paying tax on savings.
He said: “A cash ISA is simply a savings account you don’t pay tax on. You can put £20,000 in per tax year. Once you put the money inside a cash ISA, it is protected from tax.
“They’re just a savings account in a special tax wrapper you don’t pay tax on. The 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 can put £20,000 in this tax year, then £20,000 in the next tax year, and if you’re lucky enough to max it out each year, you can protect more and more of your savings inside a cash ISA without having to pay tax on it.”
Martin added that depending on how much you earn, you could protect 20% of your interest being taken away by the taxman, or 40% to 45% if you earn more than £50,000 or £125,000.
The second method is Premium Bonds.
Martin continued that Premium Bonds, run by NS&I, are also a good way to legally avoid paying tax on savings, especially if you have already maxed out your Personal Savings Allowance and your cash ISA limit of £20,000 for the year.
He added: “The prizes that you get from Premium Bonds are also tax-free. I would always go for a cash ISA first, with the rate on Premium Bonds for most people you will earn less than you would in a top cash ISA. But if you are going to be paying tax on your savings and you’ve got a good whack you could be putting in Premium Bonds then they could become a pretty interesting option for you.”
