HMRC loophole means Personal Allowance can be increased to £18,570 (2025)

A little-known loophole means you might be entitled to more tax-free income

UK households are being urged to see if they can claim up to £18,570 tax-free by taking advantage of a little-known HMRC loophole. Normally, workers can earn up to £12,570 without paying Income Tax, known as the Personal Allowance.

However, those earning under £18,570 per year can boost their tax-free allowance to that amount by using HMRC's Starting Rate for Savings. This allows individuals to add an extra £5,000 tax-free allowance for savings interest income.

If employment or pension income is below £12,570, they can claim the full £5,000 allowance, earning up to £5,000 in interest tax-free. A further £1,000 can be added via the Personal Savings Allowance, allowing another £1,000 of savings interest to be earned tax-free.

Financial expert Martin Lewis explains: "If you earn less than £18,570 a year from earned income and savings combined, then all your interest from those savings could be tax-free."

He adds, "That's because you get your personal allowance before you start to pay income tax (£12,570), plus the starting rate for savings (up to £5,000) and the personal savings allowance (£1,000) all in combination.", reports Chronicle Live.

It's important to note that for those earning over £12,570, their starting savings rate allowance will decrease by £1 for every £1 they go over the limit.

As explained by Martin Lewis' Money Saving Expert: "Cheryl: No income from work, has £20,000 of savings income. In this scenario, Cheryl would be required to pay a tax of just £286. Since she has no earned income, her savings interest is largely covered by a combination of allowances:

• Personal allowance – the first £12,570 is tax-free
• Starting savings rate – the next £5,000 is also tax-free, meaning £17,570 of the interest income is taxed at 0%
• Personal savings allowance – ensures the following £1,000 is tax-free, so £18,570 is taxed at 0%."

This leaves Cheryl with £1,430 of savings income on which she will need to pay tax. As she has no other income, this will be charged at the basic 20% rate, resulting in a tax payment of £286.

HMRC clarifies: "You may also receive up to £5,000 of interest and not have to pay tax on it. This is your starting rate for savings.

"The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be. "You're not eligible for the starting rate for savings if your other income is £17,570 or more.

"Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.

"HMRC provides an example:

"You earn £16,000 of wages and get £200 interest on your savings.

"Your Personal Allowance is £12,570.

It's used up by the first £12,570 of your wages. "The remaining £3,430 of your wages (£16,000 minus £12,570) reduces your starting rate for savings by £3,430.

"Your remaining starting rate for savings is £1,570 (£5,000 minus £3,430). This means you will not have to pay tax on your £200 savings interest."

If you have previously paid tax on your savings income, it is possible to claim a refund through a Self Assessment Tax Return, with the option to backdate the claim by up to four years.