Money-saving expert Martin Lewis has shared two legal methods to avoid paying tax on savings amidst the ongoing cost-of-living crisis. Most working individuals who pay Income Tax are eligible for a Personal Savings Allowance from HMRC, starting at £12,570 annually. This allowance dictates the amount of interest earned on savings accounts within a tax year before tax liability kicks in, with thresholds set at £1,000 for earners below £50,270, reducing to £500 for those above, and full tax payment for individuals earning £125,000 or more.
Lewis suggests two approaches to mitigate tax on savings interest. For those filing tax returns through HMRC’s self-assessment system, the total interest earned can be declared on the form. Conversely, individuals with standard PAYE jobs earning less than £10,000 annually in savings interest do not need to take action, as the bank will automatically report to HMRC for tax code adjustments.
Moreover, placing savings in a cash ISA offers a tax-efficient option to shield savings interest from taxation, providing an allowance of up to £20,000 per tax year. The deposited funds remain tax-free and fall outside the Personal Savings Allowance calculation, offering an additional layer of tax protection. Depending on income levels, this strategy can offset tax on a portion of interest, particularly beneficial for higher earners.
Furthermore, Premium Bonds, managed by NS&I, offer a tax-free savings alternative once ISA limits and Personal Savings Allowance have been maximised. Although expected returns may be lower than top cash ISAs, the tax-free status makes Premium Bonds a viable option for individuals facing tax liabilities on interest earnings.
By employing these strategies, individuals can optimise their savings returns and navigate the tax landscape effectively, potentially providing financial relief during challenging economic times. Lewis’s insights offer valuable guidance for individuals seeking to maximise savings and minimise tax obligations.