Martin Lewis issues important HMRC tax warning to anyone with more than £10k in savings

Martin Lewis, the renowned financial expert, has sent out a crucial warning to savers about the point at which they may have to start paying tax on their savings. On his BBC Podcast, in response to a listener's question regarding taxes on savings, Mr Lewis addressed a widespread misunderstanding: it is not the savings themselves but the interest earned on them that is taxable.

The Money Saving Expert founder pointed out two significant thresholds for savings - £10,000 and £20,000 - which are based on individual income levels and can affect the tax due on savings interest. He also emphasised the importance of using the appropriate types of accounts to reduce tax liabilities.

Radio host Adrian Chiles echoed the exasperation felt by many, remarking: "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."

Lewis was quick to set the record straight: "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."

He continued: "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," reports the Express.

Expanding on the perks of tax-free savings for the public, Martin Lewis emphasised an essential figure to keep in mind - £12,570. He explained: "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."

Lewis also underscored the extra allowance for those who pay the basic rate of tax: "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."

He offered shrewd advice about the amounts to take heed of within savings accounts for optimal tax benefit: "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."

To explain further, Mr Lewis remarked: "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."

The financial expert, Mr Lewis, has highlighted the intricacies of tax relief for higher earners: "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 per cent 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," he clarified.

In addition, Mr Lewis illuminated a tax allowance that is often overlooked, particularly beneficial for low earners or those who rely solely on interest from their savings. He elucidated: "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."

He further elaborated: "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."

To illustrate, Mr Lewis provided an example: "If you earned £13,570 you'd only get £4,000 for your starting savings allowance." He further explained: "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 as 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 also addressed the common misunderstanding about 'double taxation' on savings, stating: "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."