When it comes to the personal savings allowance, everyone seems to talk about basic and higher rate taxpayers. But what about a zero-tax rated pensioner with only state pension income (circa £8,000 a year) and a very small savings interest income? Would any further savings interest income be tax-free up to the current annual personal allowance? If so, would the £1,000 tax-free savings allowance be available to be added to the personal allowance, as is suggested happens with lower rate taxpayers?
And as a zero-rated taxpayer what savings interest tax would an individual be liable for and where would it start while under the personal allowance?
An extra tax break already helps those on a low income either pay no tax or reduced tax on their savings. This £5,000 ‘starting rate for savings’ means anyone with total taxable income under their personal income tax allowance plus £5,000 will not pay any tax on their savings.
So if your total taxable income is less than £18,500 in 2019-20, you won’t pay any tax on your savings.
It helps to think of these allowances sitting on top of each other: first the personal allowance (£12,500 for 2019-20); then the £5,000 starting savings rate at 0%; finally the personal savings allowance worth up to £1,000.
When HMRC calculates the tax you owe, they first look at your income from other sources, then your savings income. For example, if you earn £8,000 a year from a pension and £9,850 interest from savings, you won’t pay any tax.