Maximising Your Tax-Free Savings Income in 2024/25

In the 2024/25 tax year, UK taxpayers have various opportunities to enjoy tax-free savings income. Depending on your tax rate, you can take advantage of personal allowances, savings allowances, and special tax rates to reduce your tax liability. Let’s explore how you can maximise your tax-free savings income.

Personal Allowance

Your personal allowance is the amount of income you can earn before you start paying income tax. For many, this allowance is primarily used against employment or pension income. However, if you don’t fully use your personal allowance elsewhere, the remaining balance can be applied to your savings income, allowing it to be received tax-free.

Savings Allowance

In addition to the personal allowance, basic and higher-rate taxpayers are entitled to a savings allowance. For the 2024/25 tax year, the savings allowance is:

  • £1,000 for basic rate taxpayers
  • £500 for higher rate taxpayers

This allowance is in addition to both the personal allowance and the dividend allowance. Rising interest rates in recent years may mean that some taxpayers now receive more interest than their savings allowance covers. If this applies to you, you must notify HMRC and possibly file a Self Assessment tax return. Registering for Self Assessment is crucial if your interest income exceeds your savings allowance.

No Savings Allowance for Additional Rate Taxpayers

Taxpayers who pay tax at the additional rate (on taxable income over £125,140) do not receive a personal savings allowance and must pay tax on all savings income unless it is otherwise exempt. Additionally, the personal allowance is fully abated at this income level, leaving no tax-free income for these high earners.

Savings Starting Rate

The savings starting rate allows some taxpayers to benefit from a 0% tax rate on their savings income. The savings starting rate band is £5,000. However, this band is reduced by any taxable non-savings income that exceeds the personal allowance. In 2024/25, the standard personal allowance is £12,570. Therefore, the full £5,000 savings starting rate band is only available if your other taxable income is less than £12,570. The savings starting rate applies before the personal savings allowance, potentially allowing for up to £5,000 of additional tax-free savings income.

Tax-Free Savings Accounts

Savings held in tax-free wrappers such as Individual Savings Accounts (ISAs) provide another avenue for earning tax-free interest. In 2024/25, you can invest up to £20,000 in an ISA, with any interest earned being completely tax-free.

Maximising Your Tax-Free Savings Income

By combining the personal allowance, savings starting rate, and savings allowance, it’s possible to receive up to £18,570 of savings income tax-free in 2024/25. This total includes:

  • Personal allowance: £12,570
  • Savings starting rate band: £5,000
  • Savings allowance: £1,000 (for basic rate taxpayers)

Additionally, any income from tax-free savings accounts like ISAs is on top of this amount, further increasing your potential for tax-free savings.

Need More Help?

Navigating these allowances and rates can be tricky, but maximising your tax-free savings income is worth it. For personalised advice tailored to your situation, contact Jon Davies Accountants today. We’re here to help you make the most of your savings in the new tax year.

Reach out to Jon and the team for expert advice and support. Let’s make tax simple together!

 

 

 
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