You could avoid paying tax with two fully legal methods, says Martin Lewis
Most of us could do with paying less tax, especially in the cost-of-living crisis. But money expert Martin Lewis has revealed two methods to avoid paying tax on your savings. And they're both completely legal.
HMRC gives a Personal Savings Allowance to everyone who works and pays Income Tax, meaning those earning more than £12,570 a year. This allowance is the amount you can make via interest on your savings accounts in a tax year, and is paid to you by your bank.
If you earn less than £50,270, you can earn £1,000 in savings interest before you owe tax. But people earning above that can only earn £500, and those earning £125,000 or more must pay tax on all of their savings.
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Because many savings accounts offer as much as 5 per cent interest at the moment, it is easy to go over this limit with just £10,000 to £20,000 of savings, depending on your income. But Martin Lewis has shared two fully legal methods to avoid tax on savings interest, reports the Express.
If you file a tax return through the HMRC self assessment tax return system, which HMRC requires some people to do, then you can enter the total amount of interest you earned in your tax return.
People with normal PAYE jobs don't usually have to submit a tax return, and as long as you’re earning less than £10,000 off of savings interest a year, you don’t have to do anything. This is because your bank will automatically send the information to HMRC so it can alter your tax code to change what you pay.
However, if you want to avoid paying the savings tax, you can use a cash ISA to legally protect yourself from being taxed on your savings.
Martin Lewis said: “A cash ISA is simply a savings account you don’t pay tax on. You can put £20,000 in per tax year. Once you put the money inside a cash ISA, it is protected from tax.
“They’re just a savings account in a special tax wrapper you don’t pay tax on. The money in there, you don’t pay tax on it and it doesn’t count towards the interest in the Personal Savings Allowance.
“This is on top of that. As long as it stays inside the Cash ISA. You can put £20,000 in this tax year, then £20,000 in the next tax year, and if you’re lucky enough to max it out each year, you can protect more and more of your savings inside a cash ISA without having to pay tax on it.”
Depending on how much you earn, you could protect yourself from paying tax on 20 per cent of your interest, or 40 to 45 per cent if you earn more than £50,000 or £125,000.
The money-saving expert also explained Premium Bonds, run by NS&I, are also a good way to legally avoid paying tax on savings. If you have already maxed out your Personal Savings Allowance and your cash ISA limit of £20,000 for the year, this could work especially well for you.
He added: “The prizes that you get from Premium Bonds are also tax-free. I would always go for a cash ISA first, with the rate on Premium Bonds for most people you will earn less than you would in a top cash ISA.
"But if you are going to be paying tax on your savings and you’ve got a good whack you could be putting in Premium Bonds then they could become a pretty interesting option for you.”
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