Bank savings account £5,000 warning as HMRC explains ‘personal limits’ threshold

People often prefer to maintain a financial cushion tucked away in their savings accounts – however, HM Revenue and Customs officials have cautioned that individuals could breach regulations concerning savings interest if they exceed a £5,000 ‘starting rate’.

Under existing financial regulations, people are permitted this amount in interest before becoming liable for tax. Nevertheless, this threshold can vary depending on an individual’s other income sources which consume their personal tax allowance.

HMRC stated that “Most people can earn some interest from their savings without paying tax.”

The department outlines that allowances for earning interest before taxation becomes applicable include:

• your Personal Allowance
• starting rate for savings
• Personal Savings Allowance

Individuals may utilise their Personal Allowance to earn interest tax-free provided they haven’t exhausted it through wages, pension or alternative income streams.

The standard Personal Allowance stands at £12,570, representing the income amount exempt from taxation. The tax year spans from 6 April to 5 April the subsequent year. This figure reduces if earnings exceed £100,000.

Income Tax rates and bands

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,570. Chancellor Rachel Reeves in the November Budget froze the levels for another three years until 2031 meaning they will have remained the same for a decade.

Income tax bands are different if you live in Scotland.

Income tax bands differ for Scottish residents.

Those on lower incomes get an extra tax-free allowance of up to £5,000 for their savings.

• If your income from pension or work is under the personal allowance (£12,570), you get the full £5,000, meaning you can earn up to five grand in savings interest without being taxed.
• If your income from pension or work is above the personal allowance (£12,570), you lose £1 of the £5,000 starting rate for savings for each £1 you earn above the personal allowance.
• If your income from pension or work is £17,570 or more. You don’t get any of the £5,000 starting rate for savings.

Your personal savings allowance (PSA) is valued at up to £1,000. The PSA allows anyone who pays the basic 20% tax rate (those earning more than the £12,570 personal tax allowance but less than the £50,270 per year higher rate tax threshold) to earn up to £1,000 per year in savings interest before any tax is due.

This is in addition to the £5,000 starting savings rate. Therefore, if you’re a low earner, you can earn up to £5,000 in savings interest without paying tax, and also pay no tax on the next £1,000 of savings interest – utilising your personal savings allowance.

Interest covered by your allowance

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

If your other income is £17,570 or more

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

If your other income is less than £17,570

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.

FOr more information on the savings tax limits click on the Gov website here.