Shutterstock
This article is for general guidance only and is not financial or professional advice. Any links are for your own information, and do not constitute any form of recommendation by Saga. You should not solely rely on this information to make any decisions, and consider seeking independent professional advice. All figures and information in this article are correct at the time of publishing, but laws, entitlements, tax treatments and allowances may change in the future.
What if you could have over £27,000 in income this year and not pay a single penny in tax on it? It sounds too good to be true, but for some people, it’s a legitimate possibility. By combining a series of often-overlooked tax breaks, you can legally ‘stack’ your allowances to build a significant tax-free income.
The secret lies in making the most of separate allowances. Not all of them will apply to everyone, but you might be able to get more tax-free than you thought. Here, we explain how each one works and how they can add up to that impressive £27,070 figure.
What’s on this page?
This is a little-known tax-free allowance worth up to £5,000 that may be applied to your savings income.
Anna Bowes, personal savings expert at financial planning company The Private Office, explains: "Many people, particularly those over 50 living on a modest income or relying mainly on savings interest, don’t realise they may be entitled to this allowance.
"It can give you up to £5,000 of savings interest free of tax, on top of the Personal Savings Allowance (worth £1,000 for basic-rate taxpayers). Put together, it means lower-income savers could receive much or even all of their savings interest tax-free.”
This is on top of the ISA allowance everyone gets, which allows you to save up to £20,000 a year in an ISA without paying tax on the interest (or on the dividends and capital gains).
Whether you get the allowance – and how much you get – depends on your income.
If your income from pension or work is under £12,570, you get the full £5,000, meaning you can earn up to £5,000 in savings interest per tax year without being taxed. If you have more than £17,570 of income, you won’t qualify for the allowance.
Note that when we say ‘income’, any savings interest or dividends are excluded. If your income from pension or work is between £12,570 and £17,570, you lose £1 of the £5,000 starting rate for savings for each £1 you earn above £12,570.
So, if someone earned £15,000, their limit would be almost halved to £2,570. However, there are still other tax-free allowances that can be used on savings interest.
You don’t need to claim the starting rate for savings: it will be applied automatically when your tax bill is calculated.
The personal allowance is worth £12,570 for most people, and is typically the first tax-free allowance to be deducted from your total income. Note that your personal allowance will be lower if your adjusted net income is above £100,000, and it will be higher if you claim the blind person’s allowance.
According to the LITRG, it’s usually best to use your personal allowance against earned income or non-savings income first.
As an example, let’s imagine Jenny. She has income from a part-time job of £11,000 and savings interest (outside of an ISA) of £7,500. Her employment income would be tax-free as it would be covered by the £12,570 personal allowance, with £1,570 left over.
The remaining personal allowance would then be used against the £7,500 savings interest, leaving £5,930 that is potentially taxable. But as we’ve seen, Jenny would also get the full £5,000 starting rate for savings, as her wages are below £12,570.
That leaves £930 that could be liable for tax. But as you might have guessed, there’s another tax-free allowance that can be used.
The personal savings allowance is worth £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers (additional-rate taxpayers don’t get any allowance).
It applies to interest from bank and building society accounts, credit union accounts, and also peer-to-peer lending and some investment funds and investment trusts. There’s a full list of what it applies to on the government site.
Interest earned on an ISA is tax-free anyway, so your personal savings allowance doesn’t need to be used for that. In Jenny’s case, she’s classed as a basic-rate taxpayer (as her total income is above the personal allowance but less than £50,271), so she gets the full £1,000 allowance.
This means it more than covers her remaining £930 savings interest, resulting in no tax charge on any of her £7,500 savings interest.
Let’s look at another example to show the personal savings allowance in action. Chris has £13,000 pension income and £6,200 savings income (£19,200 total).
When working out tax liabilities, Bowes explains that you deal with the savings income last:
Robert Salter, director at accountants Blick Rothenberg, says: “In addition to the savings allowances previously mentioned, it’s important for people to realise there are other tax-free income options available, which may mean that one legitimately receives additional income in the UK on a tax-free basis.”
For example, if you have a spare room at home – maybe your grown-up children have moved out – you may consider taking in a lodger to earn some extra tax-free cash.
The government offers rent a room relief worth £7,500 for people letting furnished accommodation within their own home. This means if your rental income doesn’t exceed £7,500, you won’t have to pay any tax on it.
To qualify, the furnished accommodation must be in your only or main residence, and the income (before expenses) from renting out the room(s) must not exceed the limit of £7,500. The limit is £3,750 each if the income is split between two people.
There is also a trading allowance, which allows people to earn up to £1,000 tax-free from self-employment, casual services like babysitting or gardening, or buying and selling for profit (for example on eBay, Etsy or Vinted). Sometimes it’s referred to as the ‘hobby allowance’, or that it’s for ‘miscellaneous income’.
Let’s say Jenny sold jars of homemade jam for £250 and hired out some garden tools for £200 during the 2025/26 tax year.
That £450 is below £1,000, so the trading allowance fully covers it, and she won’t have to pay a penny in tax on her ‘side hustle’ income. If you’re having clear-out and selling some of your possessions, that is usually completely tax-free.
You might not be able to use all of the allowances shown here, although for some people it’s possible. Let’s imagine Susan, who has the state pension, some savings, a spare room now the children have left, and sells crafts online. She could have a total income of £27,070 without paying a penny in tax. And she can earn even more than that if she also has some ISA income, which will be tax-free.
Salter points out: “Whilst governments have frozen (or even reduced) some of the tax-free amounts that taxpayers can benefit from over the last few tax years – and some of these will be frozen until at least April 2028 as things presently stand – it is still possible for taxpayers to receive significant amounts on a tax-free basis with careful planning.”
Enjoy the freedom to withdraw your savings at any time.
.jpg?la=en&h=354&w=616&hash=BE59986E855569FEC6926261D767F978)
The UK’s top loyalty schemes, from Tesco and Asda to M&S Sparks and MyWaitrose.
Swerve under-performing accounts and consider moving your money to savings products with market-leading rates.
