A new tax update has caught the attention of savers and pensioners across the UK. Reports of a potential £18,570 tax‑free personal allowance under current savings rules have prompted many people to ask the same question: is the standard tax‑free allowance really increasing?
The answer requires a bit of explanation.
While the standard Personal Allowance set by HM Revenue and Customs has not been universally raised to £18,570, certain individuals — particularly those with modest earnings and savings income — may effectively be able to earn up to that amount tax‑free under combined rules.
Here’s a clear and practical breakdown of what this means, who could benefit, and how the savings rule works.
What Is the Standard Personal Allowance
The Personal Allowance is the amount of income you can earn each tax year before paying Income Tax.
For most people, this allowance applies to:
Employment income
Private pensions
The State Pension
Rental income
Other taxable earnings
The Personal Allowance forms the foundation of the UK’s income tax system.
However, savings interest is treated slightly differently — and that’s where the potential £18,570 figure comes into play.
Understanding the Savings Rule
Savings interest has its own additional tax protections beyond the Personal Allowance.
There are three key layers:
Personal Allowance
Starting Rate for Savings
Personal Savings Allowance
When combined, these can significantly increase the amount some people can receive tax‑free.
The Starting Rate for Savings Explained
The Starting Rate for Savings allows eligible individuals to earn up to £5,000 in savings interest tax‑free.
But there’s an important condition.
This £5,000 allowance is reduced by £1 for every £1 of non‑savings income above the Personal Allowance.
In simple terms, the lower your non‑savings income, the more of this £5,000 band you can use.
This rule is particularly beneficial for pensioners with modest income outside their savings.
The Personal Savings Allowance
In addition to the Starting Rate for Savings, most basic‑rate taxpayers can earn up to £1,000 in savings interest tax‑free under the Personal Savings Allowance.
Higher‑rate taxpayers receive £500.
Additional‑rate taxpayers do not receive this allowance.
These allowances stack on top of the Personal Allowance and Starting Rate for Savings in certain circumstances.
How £18,570 Becomes Possible
Here’s how the numbers can work in practice.
Example:
Personal Allowance: £12,570
Starting Rate for Savings: up to £5,000
Personal Savings Allowance: £1,000
If someone has very low non‑savings income, they could theoretically receive:
£12,570 in income
£5,000 in savings interest
£1,000 in additional savings interest
This creates a combined tax‑free total of £18,570 (excluding the extra £1,000 PSA in some simplified reporting examples).
The key point is that this is not a universal increase in the Personal Allowance. It applies only in specific savings situations.
Who Benefits Most
The individuals most likely to benefit include:
Pensioners with modest State Pension income
People with small private pensions
Part‑time workers with savings
Individuals who rely partly on interest income
For example, someone receiving a modest pension and earning interest from savings accounts could potentially remain within tax‑free limits.
Example Scenario 1
Margaret receives £11,500 per year in pension income.
Because her non‑savings income is below the Personal Allowance, she has unused allowance remaining.
She also earns £4,000 in savings interest.
In this scenario, much or all of her interest could fall within the Starting Rate for Savings band and Personal Savings Allowance — meaning she may pay no tax at all.
Example Scenario 2
David earns £13,000 in pension income.
He exceeds the Personal Allowance slightly.
His Starting Rate for Savings band is reduced accordingly.
If he also earns £3,000 in interest, part of that may fall within tax‑free bands, while the remainder may be taxed at the basic rate.
Why This Matters Now
Interest rates have risen compared to the historic lows seen in previous years.
As a result, savers who once earned very little interest may now receive significantly more.
Even modest balances can produce noticeable returns.
With higher interest comes greater awareness of potential tax implications.
HMRC’s clarification of savings rules aims to ensure people understand how allowances interact.
Is This a New Policy
The structure of the savings allowances is not entirely new.
However, increased interest earnings have made the rule more relevant.
In the past, when interest rates were close to zero, many people never approached these thresholds.
Now, with better returns on savings accounts, understanding the combined allowance is more important.
Does This Apply to Everyone
No.
The effective £18,570 tax‑free figure depends on:
Your level of non‑savings income
How much savings interest you earn
Your tax band
If your income is significantly above the Personal Allowance, the Starting Rate for Savings may not apply.
Higher‑rate taxpayers also receive a reduced Personal Savings Allowance.
What About ISAs
Interest earned inside an Individual Savings Account (ISA) is already tax‑free.
ISA interest does not count toward the savings allowances discussed here.
For some savers, using ISA accounts can simplify tax planning.
What If HMRC Contacts You
Banks report savings interest directly to HMRC.
If your interest appears high enough to affect your tax position, HMRC may:
Adjust your tax code
Issue a notice
Request clarification
Receiving a letter does not automatically mean you owe a large amount.
Often it is simply to ensure accurate records.
Pensioners and the Savings Rule
Many pensioners have modest incomes but built savings over their working lives.
For those with limited non‑savings income, the Starting Rate for Savings can provide valuable tax protection.
However, if total income grows — for example through private pension withdrawals — the available savings allowance may shrink.
Regular review of income levels can prevent unexpected tax bills.
Common Misunderstandings
There are a few misconceptions circulating:
The Personal Allowance has not universally increased to £18,570.
The figure reflects combined tax‑free bands in specific circumstances.
Not everyone can claim the full amount.
Understanding the difference between a headline figure and individual eligibility is essential.
Practical Steps to Take
If you want to understand your position:
Estimate your total non‑savings income.
Calculate expected savings interest.
Check how much of the Starting Rate for Savings band remains available.
Confirm your tax band.
Keeping simple records makes it easier to respond if HMRC queries arise.
Key Points to Remember
The £18,570 figure is not a universal Personal Allowance increase.
It reflects combined savings allowances under specific conditions.
Low non‑savings income increases eligibility for the Starting Rate for Savings.
Interest rates rising makes the rule more relevant.
ISAs remain fully tax‑free.
Final Thoughts
Headlines about a £18,570 tax‑free allowance understandably generate interest. However, the reality is more nuanced than a straightforward Personal Allowance boost.
Under current savings rules, some individuals — particularly pensioners and low‑income earners with savings — may effectively earn up to £18,570 tax‑free when allowances are combined.
The key is understanding how your income is structured.
For many households, especially those living on modest pensions with carefully managed savings, these rules can provide meaningful protection against unnecessary tax.
Taking a few minutes to review your income and savings position could ensure you benefit fully from the allowances already available to you.