Martin Lewis: Money Saving Expert explains rare savings tax rates glitch that could mean cash in your account
The ‘bizarre’ glitch means earning slightly more could shrink your take-home pay 💸
- Martin Lewis has highlighted a rare UK tax loophole affecting savings interest
- In some cases, earning more interest can actually leave you with less money
- The quirk occurs when your income crosses the higher-rate tax threshold (£50,270)
- Personal savings allowance drops for higher-rate taxpayers, causing some interest to be taxed at 40%
- Small tweaks like Gift Aid donations or pension contributions can help you keep your interest tax-free
Money Saving Expert Martin Lewis has highlighted a strange loophole in the UK tax system that means, in rare cases, you can actually be better off earning less interest on your savings rather than more.
It’s a quirky quirk, but it could cost you, or save you, hundreds of pounds if you’re right on the edge of certain tax thresholds.
The oddity arises because of the way higher-rate income tax interacts with the personal savings allowance. For the 2025/26 tax year, anyone earning over £50,270 from work pays 40% tax on income above that threshold.
Meanwhile, the personal savings allowance - the amount of interest you can earn tax-free - shrinks from £1,000 for basic-rate taxpayers to £500 for higher-rate taxpayers.
Lewis explains this with a simple example: imagine someone earns £49,300 from their job and £1,000 in savings interest outside of an ISA. That puts total income just over the higher-rate threshold at £50,300.
Because they’ve crossed the line into higher-rate tax, their personal savings allowance drops to £500. Suddenly, a portion of their interest is taxed at 40%, leaving them with £894 from the £1,000 interest - less than if they had earned slightly less interest.
Now, here’s where it gets truly bizarre. If the same person earned £950 interest instead of £1,000, their total income would be £50,250 - just below the higher-rate threshold.
They would retain the full £1,000 personal savings allowance, meaning all their interest is tax-free.
In this scenario, they take home £950, which is £56 more than if they had earned £50 more in interest. Essentially, earning more interest could actually shrink your bank balance.
Lewis says that this is a niche situation affecting relatively few people, but it’s one of the rare points in the tax code where “earn more, take home less” actually applies.
The good news is that it’s relatively easy to avoid. Two practical fixes include:
- Making a small charitable donation via Gift Aid, which reduces your taxable income.
- Increasing pension contributions, which also lowers taxable income.
Both strategies could keep you below the higher-rate threshold, preserving your full personal savings allowance and ensuring your interest is tax-free.
While this quirk may seem bizarre, Lewis points out that being aware of these tax nuances can help you keep more of your money, rather than paying unnecessary tax simply for earning slightly more on your savings.
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