How does the starting rate for savings work?

Full answer

The starting rate for savings is a lesser-known relief that primarily benefits retirees, low earners, and those with modest non-savings income, potentially allowing a substantial amount of savings interest to be earned entirely tax-free. **How it works alongside the Personal Savings Allowance** The starting rate for savings provides up to £5,000 of savings income taxed at 0%, and this is IN ADDITION to the separate Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate) -- for someone who qualifies for the full starting rate, this can mean up to £6,000 of tax-free savings interest in total (assuming they are a basic-rate taxpayer using their PSA too). **Who actually qualifies** The starting rate is only available if your other (non-savings) income -- salary, pension, self-employment profit, etc. -- is below £17,570 (the £12,570 Personal Allowance plus the £5,000 starting rate band) -- for every £1 of other income above the £12,570 Personal Allowance, the £5,000 starting rate band reduces by £1, meaning it tapers away entirely once other income reaches £17,570. **Why most working-age people do not qualify** Most people with a typical full-time salary have other income well above £17,570, meaning their starting rate band has already tapered to zero before any savings interest is considered -- this relief is primarily relevant to retirees with modest pension income, part-time workers, or those with low or no earned income but meaningful savings. **Worked example -- full benefit** A retiree has £10,000 in State Pension and other pension income (below the £12,570 Personal Allowance, so no Income Tax on this portion) and £4,000 in savings interest. Since their other income is well below £17,570, they get the FULL £5,000 starting rate band, meaning all £4,000 of savings interest is tax-free, on top of the already-unused Personal Allowance covering their pension income. **Worked example -- partial taper** Someone has £15,000 in other income (£2,430 above the £12,570 Personal Allowance) and £4,000 in savings interest. Their starting rate band tapers by £2,430 (£1 for £1), leaving £5,000 − £2,430 = £2,570 of starting rate band available. Combined with their £1,000 Personal Savings Allowance (assuming basic rate), they have £3,570 of tax-free savings interest available -- covering most, but not quite all, of their £4,000 interest. **Why this matters for retirement planning** Understanding the starting rate for savings can be valuable for retirement income planning, since structuring income to keep other (non-savings) income below £17,570 where possible can maximise the amount of savings interest that remains entirely tax-free -- relevant for those with flexibility over how they draw retirement income from different sources. **Practical tip** If you are retired or have low earned income alongside meaningful savings, check whether you qualify for some or all of the £5,000 starting rate band, since this is a frequently overlooked relief that could mean savings interest you assumed was taxable is actually entirely tax-free.

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