Martin Lewis gives savers £20,000 'limit' warning on tax payments

Martin Lewis has told people about a key threshold for savings and warned that above it people will start to pay tax. Appearing on his BBC Podcast, the personal finance expert was answering a question from a listener about paying tax on savings.

Mr Lewis said firstly the tax wasn’t on the savings themselves, rather the savings interest. But the Money Saving Expert founder explained that there were two thresholds - of £10,000 and £20,000 that people needed to be aware of depending on how much they earn.

And he said there were ways of lessening the tax people might pay by using the right kinds of accounts. Show host Adrian Chiles said: “Christina’s fed up - she’s sick of working hard getting taxed on income and then taxed on savings. How does that work? So frustrating.”

Martin immediately pointed out one key issue: “Well forgive me you are not taxed on savings. You do not pay tax on your savings. You pay tax on the interest earned on savings. And I know it is a fine difference but it is an important one. You put money in the bank or building society or wherever you do in a deposit savings account and you do not pay any tax on the money you put in, you only pay tax on the money you’ve earned.

“This is because it is treated like any other form of income although it does have special allowances and it’s really important to actually focus on what those special allowances are.”

Mr Lewis said that one key figure was £12,570 because this is the personal tax threshold for everyone: “The first thing to say is everybody has £12,570 that they can earn from any source, whether earned income or savings interest, or anything else which you don’t pay tax on - your normal standard tax-free personal allowance.

“In savings specifically you then have, if you’re a basic 20 per cent rate taxpayer, £1,000 a year of interest you can earn from any savings source which you don’t pay tax on. That’s £1,000 of interest, not £1,000 in a savings account.”

What it means is that in a good savings account people need to be wary of how much money is in there - with normal rate taxpayers being fine with £20,000 in savings: “So at 5 per cent interest as a basic rate taxpayer you can put £20,000 in a savings account and it would be tax free because that would generate £1,000 of interest.

“As a higher 40 per cent rate taxpayer, you’re allowed £500 of interest tax-free. So it would be £10,000 in there that would save you and you wouldn’t pay interest if you have in the top 5% savings account. If you happen to be lucky enough to be a top 45 per cent rate taxpayer earning over £125,000 you don’t get one of these,” Mr Lewis explained

For low earners - or people entirely living off interest from savings there is another tax allowance. Mr Lewis explained: “There is another savings allowance that is rarely spoken about. This is called the starting savings allowance. Now this is for low earners and it’s quite complicated.

“So what it says is you can earn up to £5,000 on top of your £1,000 as a basic rate taxpayer of interest tax free as a low earner. If you have earned income under £12,570 which is the standard tax allowance you can earn £5,000 on top of that in savings in this starting savings allowance in savings interest which is untaxed. For every pound you earn above £12.570 you lose a pound of the £5,000. “

Mr Lewis explained it through an example of if you earned £13,570 you’d only get £4,000 for your starting savings allowance. He added: “For people where all of their money was generated by savings interest they would have £12,570, their normal tax free allowance, they would have their £5,000 starting savings allowance and they would have their £1,000 savings allowance ads a basic rate taxpayer which means you can earn £18,570 tax free if all your money came from savings interest. And then you could have an ISA on top for £20,000 a year which would be tax free and you could put money into Premium Bonds, £50,000 of which would be tax free.”

Mr Lewis said some people describe the tax on savings as ‘double taxation’ and added: “Let’s be technical, it’s not - there are other things that are double taxation but you get taxed on the amount of money you earn on your income, and then you get taxed on the amount of money you earn on your savings. You do not get taxed on your savings.”

To listen to the full podcast click here.