HMRC has provided clarity on how tax on savings works for state pensioners after a query on social media. The Department for Work and Pensions (DWP) state pension claimant asked via X, formerly Twitter: 'Can you confirm that a pensioner does not have to pay tax on the first £1,000 of interest earned on savings.'
In response, HMRC stated: 'Pensioners have the same rules as everyone else. So if they are a basic rate taxpayer only, then yes they have a £1,000 tax-free allowance.'
Personal Savings Allowance Explained
Since April 2016, savings providers have paid interest tax-free, and the personal savings allowance (PSA) applies. Every basic-rate taxpayer can earn £1,000 interest a year without paying tax. Higher-rate payers get a £500 allowance, and additional-rate taxpayers receive none. There is no change to savings allowances for 2024/25.
Additional Tax-Free Allowance for Low Earners
Low earners may benefit from the starting rate for savings income, allowing up to £5,000/year in savings interest tax-free if income is below £12,570 this tax year. For every pound earned above this threshold, the savings allowance reduces by one pound.
Impact of Fiscal Drag
Martin Lewis, BBC and ITV star, explained: 'There have not been headline income tax raises for a couple of years because what's actually happened is they've increased income tax revenue via a stealth tax called fiscal drag. This means they have frozen all thresholds. If you were earning under the basic personal allowance of £12,570 before and your income increases due to earnings or inflation, you may start paying tax on your earnings even though prices have gone up.'
