HMRC loophole that increases Personal Allowance to £18,570

The HMRC starting rate for savings allows people to bank up to £5,000 of interest payments and not have to pay tax on it - but the more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.

Martin Lewis mentioned the scheme on his Martin Lewis Money Show, saying: "The starting savings rate (means) you can have five grand of savings tax free, in savings interest, tax free on top of your earnings plus your personal savings allowance, that's £1000. So that's 6000 pounds. So that would mean you would have £18,570 of combined earnings and savings interest, totally tax free."

But, he makes clear: "The starting savings rate only applies to lower earners who have substantial savings. That's what it's really good for, which is often pensioners."

Martin’s explaining the starting rate for savings, read more about it here… https://t.co/9nOXIn4vmc #MartinLewis

— Martin Lewis (@MartinSLewis) March 18, 2025

Who can extend their HMRC personal allowance with the starting rate for savings?

You’re not eligible for the starting rate for savings if your other income is £17,570 or more.

Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

HMRC gives this example:

"You earn £16,000 of wages and get £200 interest on your savings. Your Personal Allowance is £12,570. It’s used up by the first £12,570 of your wages.

"The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.

"Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest."

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Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on your Personal Savings Allowance.

HMRC says your allowance applies to interest from:

• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts

Savings in tax-free accounts like Individual Savings Accounts (ISAs) and some National Savings and Investments accounts do not count towards your allowance.

The rules are more complex for foreign savings and children’s accounts .

Interest on joint accounts

If you have a joint account, interest will be split equally between the account holders. Contact HM Revenue and Customs (HMRC) if you think it should be split differently.

If you go over your allowance

You pay tax on any interest over your allowance at your usual rate of Income Tax .

If you’re self-employed

If you complete a Self Assessment tax return , report any interest earned on savings there.

You need to register for Self Assessment if your income from savings and investments is over £10,000. Check if you need to send a tax return if you’re not sure.

If you’re employed or get a pension

HMRC will change your tax code so you pay the tax automatically. To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.

You will get a tax calculation letter if you have a tax overpayment or underpayment . The letters are sent between June and March of the following tax year.

If you go over your savings allowance and do not receive a letter by 31 March of the following tax year, you must contact HMRC . You should do this as soon as possible to avoid a penalty.

If you’re not employed, do not get a pension or do not complete Self Assessment

Your bank or building society will tell HMRC how much interest you received at the end of the year. HMRC will tell you if you need to pay tax and how to pay it.

Got questions on rebooting your finances for the new year? @itvMLshow is back 9pm tomorrow & I'll be taking you through big n easy savings (cards, energy, overdrafts, council tax, savings) but the rest is an ask me anything.

What do you want to know? Pls reply & team'll collate

— Martin Lewis (@MartinSLewis) January 5, 2026

How to get a rebate if you've already paid

You can reclaim tax paid on your savings interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year.

You can claim through your Self Assessment Tax Return if you complete one.

If you do not send a Self Assessment tax return, you can apply for a refund here.

You can claim a tax refund from the gov.uk site if your:

• gross income from savings and investments is £10,000 or less
• gross income from land and property is £10,000 or less
• net income from land and property is £2,500 or less
• income from foreign dividends is within this year’s dividend allowance

But, it's worth noting that is your income was higher than these limits or you’re registered for Self Assessment — you must complete a tax return. Similarly, if you live outside of the UK — there’s a different form to claim personal allowances and tax refunds.