An HMRC loophole allows you to increase your tax-free allowance to £18,570 (Image: Getty)
Households are being urged to check if they could earn as much as £18,570 without paying any tax on it, with a Personal Allowance savings rule confirmed and supplied by HMRC which combines with the usual standard tax-free Personal Allowance limit. Usually, anyone who receives an income, whether through work or through pension or property income, can only earn £12,570 without paying Income Tax on the money. This is known as the Personal Allowance, and it’s been frozen completely since 2021 and in the recent past, it was extended by ex-Chancellor Rachel Reeves for several more years, until 2031.
Prime Minister Andy Burnham and Chancellor John Healey refused to change the threshold in the most recent Budget last month, a decision money campaigner Martin Lewis described as the ‘biggest tax rise in recent history’.
Thanks to fiscal drag, the decision not to raise the thresholds means many people are facing higher and higher tax bills as wages go up each year on average, dragging more people higher up the thresholds for Income Tax. But if you earned under £18,570 in a year, you could boost your tax-free allowance all the way to that number using a HMRC allowance for savings known as the Starting Rate for Savings.
Starting Rate for Savings allows people to earn another £5,000 tax-free on top of their tax-free allowance threshold via savings interest income. If you earn less than £12,570 from work or your pension, you can get the full £5,000 allowance, which means you’re allowed to earn up to £5,000 in interest without paying a penny of tax on it.
You can then add another £1,000 on top from the standard Personal Savings Allowance, which means you can earn another £1,000 of savings interest without paying tax on that either.
Money expert Martin Lewis explains: “If you earn less than £18,570 a year from earned income and savings combined, then all your interest from those savings could be tax-free.
“That’s because you get your personal allowance before you start to pay income tax (£12,570), plus the starting rate for savings (up to £5,000) and the personal savings allowance (£1,000) all in combination.”
Those who earn over £12,570 lose £1 of their starting savings rate allowance for every £1 over the threshold.
As Martin Lewis’ MSE sets out: “Cheryl: No income from work, has £20,000 of savings income. In this scenario, Cheryl will need to pay tax of just £286. As she has no earned income, the savings interest is mostly covered by a combination of allowances:
- Personal allowance – the first £12,570 is tax-free
- Starting savings rate – the next £5,000 is tax-free, so now £17,570 of the interest income is taxed at 0%
- Personal savings allowance – means the next £1,000 is tax-free, so £18,570 is taxed at 0%.
“This leaves Cheryl with £1,430 of savings income which she will need to pay tax on. As she has no other income, this will be charged at the basic 20% rate, so she’ll pay £286 in tax.”
HMRC explains: “You may also get up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.
“The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
“You’re not eligible for the starting rate for savings if your other income is £17,570 or more.
“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 the 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.”
If you already have paid tax on your savings income, you can reclaim it via Self Assessment Tax Return and can backdate your claim for any of the past four years.
HMRC Tax-Free Personal Allowance Could Reach £18,570 Under One Important Rule – Millions of Britons Urged to Check Their Entitlements
Millions of people across Britain could potentially receive a significant tax-free boost under an important HMRC savings rule, allowing eligible individuals to receive up to £18,570 in income and savings interest without paying Income Tax.
The revelation could be particularly welcome for pensioners, people on modest incomes and households relying on savings to supplement their finances.
However, there is an important distinction: the standard Personal Allowance has not increased to £18,570. It remains £12,570 for the 2026/27 tax year.
Instead, the higher figure comes from combining several separate tax-free allowances, including a little-known provision known as the Starting Rate for Savings.
Understanding how these rules work could help eligible taxpayers avoid paying unnecessary tax.
The £18,570 Tax-Free Opportunity Explained
Under current HMRC rules, most people can earn £12,570 annually before paying Income Tax.
But eligible individuals may benefit from additional allowances relating to savings interest.
These include:
- Personal Allowance: £12,570 of income tax-free.
- Starting Rate for Savings: Up to £5,000 of savings interest tax-free.
- Personal Savings Allowance: Up to £1,000 of savings interest tax-free for basic-rate taxpayers.
Combined, these allowances can potentially provide £18,570 of tax-free income and savings interest.
This is particularly relevant for people whose earnings from employment or pensions are relatively low.
The One Rule That Makes the Difference
The key is how much income you receive from sources other than savings interest.
If your non-savings income is below £12,570, you may qualify for the full £5,000 Starting Rate for Savings allowance.
For every £1 of non-savings income above £12,570, your £5,000 starting savings allowance is reduced by £1.
If your other income reaches £17,570, the Starting Rate for Savings disappears completely.
This means people with modest pensions, part-time earnings or limited employment income could potentially benefit.
Pensioners Could Be Among Those Who Benefit
The rules could be particularly useful for retired people who receive relatively small pension incomes but have accumulated savings throughout their working lives.
For example, someone receiving £10,000 annually from a pension could potentially benefit from:
- £10,000 pension income covered by their Personal Allowance.
- £5,000 savings interest covered by the Starting Rate for Savings.
- Up to £1,000 additional savings interest covered by the Personal Savings Allowance.
This could mean up to £16,000 of combined pension income and savings interest without Income Tax, assuming the individual qualifies for the full allowances.
People with no other taxable income could potentially reach the £18,570 figure.
Martin Lewis Has Highlighted the Importance of Savings Allowances
Money-saving guidance has repeatedly highlighted how taxpayers can overlook the Starting Rate for Savings.
Many people assume that the standard £12,570 Personal Allowance is the only amount they can receive without paying Income Tax.
However, savings interest has its own allowances.
The rules are particularly important because banks and building societies may pay interest that becomes taxable depending on an individual’s total income and circumstances.
Checking eligibility could help people understand whether they have paid more tax than necessary.
How to Check Whether You Qualify
HMRC provides information about savings allowances and how Income Tax applies to different types of income.
People should:
- Calculate their total annual income from employment and pensions.
- Check how much interest their savings accounts generate.
- Establish whether they qualify for the Starting Rate for Savings.
- Check their Personal Savings Allowance.
- Review any tax already deducted from their savings interest.
If tax has been overpaid, eligible individuals may be able to reclaim it through HMRC.
Keeping bank statements and tax records can make the process easier.
Important Warning: £18,570 Is Not a New Personal Allowance
Although the headline figure is attractive, it is important not to confuse the combined savings allowances with an increase in the official Personal Allowance.
HMRC confirms that the standard Personal Allowance remains £12,570 for the 2026/27 tax year.
The £18,570 figure is a potential combined tax-free amount for people who meet the relevant conditions.
It is not an automatic entitlement for everyone, and the amount will depend on other income and savings interest.
Conclusion: A Little-Known HMRC Rule Could Help Eligible Households
With household budgets continuing to face pressure, understanding tax-free savings allowances could make a meaningful difference.
The Starting Rate for Savings is particularly important for people with modest earnings or pension income who also receive interest from savings accounts.
Although the standard Personal Allowance remains frozen at £12,570, combining the available allowances could allow eligible individuals to receive up to £18,570 without paying Income Tax.
The message for taxpayers is simple: do not assume you are receiving all the tax-free allowances available to you. Check your income, review your savings interest and make sure you are not paying more tax than necessary.