HMRC’s ‘little known’ tax-free allowance after state pension query | Personal Finance | Finance

HMRC has pointed to a ‘little known’ tax allowance that could benefit state pensioners, which was mentioned by Martin Lewis. A taxpayer got in touch over X to ask: “In a Martin Lewis article he noted that pensioners who get an income of less than £12,570 can take £5,000 of savings interest a year free of tax.

“When he states “income” is the state pension regarded as income?”

The tax authority replied to explain that the state pension is classed as income. The state pension forms part of a person’s income for income tax purposes including going towards using up the £12,570 personal allowance.

The full new state pension is currently £221.20 a week, or £11,502.40 a year, which is only just over £2,000 away from being subject to income tax.

The taxpayer then asked HMRC: “So what is the £5,000 and does it need to be noted as interest that is not taxable anywhere?”

The customer support team provided an answer, saying: “That will be the starter rate for savings, we’ll apply that automatically if you’re entitled to that.”

But the customer was still confused about what the Martin Lewis article was referring to.

He asked: “Thanks but why is Martin Lewis saying that there is £5,000 of interest which pensioners receiving under £12,570 can receive per annum without paying tax on it and it’s a little known fact that pensioners are not aware of?”

HMRC clarified: “I’m sorry, what I meant was the £5,000 that Martin Lewis is referring to is called the Starter Rate for Savings by us.”

The £5,000 starting rate for savings allows a person to earn up to £5,000 of interest each year without paying tax, but this shrinks as you earn more income.

Once you use up your £12,570 personal allowance, each £1 of income above this takes away £1 from the starting rate. So once your income reaches £17,570 a year or more, you no longer have a starting rate for savings.

However, there is also a personal savings allowance, which allows you to earn a certain amount of interest without paying tax on it. Those on the basic rate of income tax can earn up to £1,000 in interest while those on the higher rate have a £500 savings allowance.

Once you reach the additional rate for income tax, you have no savings allowance to use.

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