Savers with £10,000 or more in the bank may owe tax they have never thought about. Martin Lewis raised the point on his podcast, and on closer reading the catch is narrow: the tax does not fall on the savings themselves, only on the interest they earn.
Most people will never pay it, because allowances cover the first slice of interest. Lewis put it plainly. “The more you earn and the more savings you have, the more likely you are to be taxed on your interest,” he said. A basic-rate taxpayer, on 20%, can earn £1,000 of interest across all savings accounts before tax applies. A higher-rate taxpayer, on 40%, gets £500. Someone paying 45% gets no allowance at all, so every pound of interest is taxable.
How the allowances stack
The mechanics here have layers, as MoneySavingExpert.com sets out. Everyone has a £12,570 personal allowance for income, and interest counts toward it alongside earnings. Lower earners may also qualify for a “starting savings rate” on up to £5,000 of interest, but it shrinks as earned income rises. The £1,000 and £500 personal savings allowance sits on top of both.
Lewis gave a worked example. Someone earning £14,570 from work loses £2,000 of the starting rate, which leaves £3,000 of tax-free savings interest. Taken together, a lower earner could shelter as much as £18,570 of combined income and interest. Pensioners and people on low incomes often have little to worry about unless their interest climbs sharply.
Why more people may be caught
The pressure comes from rates. Lewis noted that high street banks were offering up to 4.75% on easy-access accounts, and at that level a pot of around £10,000 or more can generate interest that overruns the allowance. There is a policy risk too. He warned that government proposals to cut the annual cash ISA limit from £20,000 to as little as £4,000 would push more money into taxable accounts. Money already inside an ISA is safe, he said.
What to do about it
His main answer is the cash ISA. “Cash ISA interest does not count towards any savings allowances. So if you’re going to pay tax, protecting it in a top cash ISA is crucial,” he said. Premium Bonds are another route, since winnings are tax-free. Stocks and shares ISAs also shelter returns, though Lewis cautioned that they call for careful risk management.
As for collection, many salaried workers will never see a bill. HMRC simply adjusts their PAYE code, so tax on interest can leave their pay without notice. People who file self-assessment returns must declare the interest themselves.
