Understanding the UK Starter Rate for Savings Interest

When it comes to personal finance, most UK taxpayers are aware of their tax-free Personal Allowance — the amount of income you can earn each year without paying income tax. However, far fewer are familiar with the Starter Rate for Savings, a little-known tax relief that can allow savers to earn up to £5,000 in interest completely tax-free, in addition to their Personal Allowance and Personal Savings Allowance. If you earn a modest income and have interest-generating savings, this relief could be worth hundreds of pounds each year.

Let’s break down what the starter rate is, how it works, and who can benefit — with a practical example.


What is the Starter Rate for Savings?

The Starter Rate for Savings is a 0% tax rate that applies to savings interest for low earners. In the 2024/25 tax year, if your total income (excluding savings) is below £17,570, you may qualify for this additional tax-free interest band.

It’s important to note that this is separate from:

  • The Personal Allowance: currently £12,570 (2024/25), which covers most people’s salary or pension income.

  • The Personal Savings Allowance (PSA): which allows basic rate taxpayers to earn £1,000 of interest tax-free.

The Starter Rate effectively gives qualifying savers up to £5,000 of additional tax-free interest on top of the PSA.


How Does It Work?

The Starter Rate for Savings applies on a sliding scale. The less you earn in salary or non-savings income, the more of the starter rate band you can access.

The full £5,000 starter band is only available if your non-savings income is less than or equal to the Personal Allowance (currently £12,570). For every £1 you earn above that, the starter band shrinks by £1 — until it disappears altogether when your non-savings income reaches £17,570.


A Practical Example: Salary of £12,570 and £6,000 in Interest

Let’s take a look at a real-world scenario.

Lucy earns £12,570 from her part-time job. This income is fully covered by her Personal Allowance, so she pays no income tax on it.

In addition, Lucy has £6,000 in savings interest from a high-interest savings account. Here’s how her interest is treated:

  1. £5,000 of her interest qualifies for the Starter Rate. Because she has no taxable income beyond her Personal Allowance, she receives the full starter band. This £5,000 is taxed at 0%.

  2. The remaining £1,000 falls into the Personal Savings Allowance (PSA). As a basic rate taxpayer (she has no taxable income above £12,570), she gets the full £1,000 PSA — again, tax-free.

Total tax paid on £6,000 savings interest? £0.

This is a great example of how individuals with lower incomes can still earn a healthy return on their savings without triggering a tax bill.


Who Can Benefit from the Starter Rate?

You’re likely to benefit from the Starter Rate if:

  • Your only income is from part-time work, pensions, or other non-savings sources under £17,570.

  • You receive interest from bank accounts, savings bonds, or other interest-bearing products.

  • You’re retired or semi-retired and live off a combination of modest income and savings.

Even if you don’t qualify for the full £5,000, you may still benefit from a portion of the Starter Rate band — reducing or eliminating your tax bill on savings.


Summary

  • The Starter Rate for Savings allows you to earn up to £5,000 in interest tax-free, if your non-savings income is low.

  • Combine it with the £1,000 Personal Savings Allowance, and low earners can enjoy up to £6,000 in tax-free interest.

  • Always check whether you qualify and be sure to claim your entitlement if tax was wrongly deducted.

For many, this is a powerful — and underused — relief that makes your money go further.

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