Martin Lewis reveals hack to avoid paying tax on savings interest as HMRC to rake in £10.4bn

Britons are paying record levels of tax on their savings as higher interest rates push them over the earnings threshold, sparking Martin Lewis to offer some sage advice.

HMRC is expected to rake in a whopping £10.4 billion on interest made by savers in 2024/25. To put that into context it collected just £1.4bn three years ago (then £3.9bn in 2022/23 and £9.1bn in 2023/24).

Savers pay tax on their interest earned once they hit a certain threshold. For those paying the Basic Rate income tax, that threshold is £1,000. For higher earners the threshold is only £500.

A basic rate taxpayer (earning less than £50,270) with a 5% interest rate can save up to £20,000 before having to pay tax, while a higher rate taxpayer can save £10,000 tax-free, Hargreaves Landsdown calculates.

Income Tax bandTax-free savings interestTax payable over threshold
Basic rate£1,00020%
Higher rate£50040%
Additional rate£045%

But if interest rates were at 0.5% a basic rate taxpayer would only start paying tax once they’d saved more than £200,000.

NimbleFins' Best Savings Accounts Guide shows you can currently get 5.22% for one year with My Community Bank. You can get the same rate for six months with Oxbury Bank.

Nationwide is offering its customers an exclusive bond at 5.5% for 18 months.

Three ways to avoid tax on savings

NimbleFins previously explained how to save money and have a lower tax burden.

This includes:

  1. Buying Premium Bonds

  2. Investing in ISAs

  3. Topping up your pension

Read the full details on how to avoid paying tax on savings, here.

About 2.7 million people are expected to pay tax on their savings in 2023/24, up from 1.7m the year before, as reported by NimbleFins.

This is no only due to interest rates, but also because income tax thresholds have been frozen so more people are moving into the higher rate tax band, slashing their limit on savings interest in half.

Personal finance expert Martin Lewis explained a way to avoid paying tax on a high interest account, which works if you're expected to earn different amounts each year and you can cleverly time when you're paid the interest.

That's because the tax is applied when the interest is paid out.

Martin told his The Martin Lewis Podcast listeners: “Just a quick note on interest at maturity. The interest crystallises for tax purposes when you can access it. So if you’re getting a fixed account, you for example don’t want the interest this year because you’re earning more this year for example let’s say you’re retiring this year so you’d earn more next year.

“Then by fixing an account and making sure the interest is only paid next year and you can only access it next year, you can move the interest into the next tax year and then that could be beneficial to you."

Read more:

Helen Barnett

Helen is a journalist, editor and copywriter with 15 years' experience writing across print and digital publications. She previously edited the Daily Express website and has won awards as a reporter. Read more here.