HMRC update over threshold for when pensioners have to pay 20% tax

HMRC has spoken out to clarify how a particular tax applies to pensioners. The update comes ahead of a hike in the rates people have to pay which is just around the corner. A member of the public contacted the tax authority over social media asking for help about how the regulations work. They asked: "Can you confirm that a pensioner does not have to pay tax on the first £1,000 of interest earned on savings." Under the personal savings allowance, those on the basic rate of income tax can earn up to £1,000 in savings interest each tax year without incurring any tax liability. This allowance is halved for higher rate taxpayers, dropping to £500, while those on the additional rate receive no allowance whatsoever and must pay tax on all interest earnings they accrue. This differs entirely from money held in cash ISAs, where all interest earned is completely exempt from tax. Similarly, stocks and shares held within an ISA wrapper are not subject to any tax on investment growth. Responding to the query, HMRC made plain how the rules work. The group said: "Pensioners have the same rules as everyone else. So if they are a basic rate taxpayer only, then yes they have a £1,000 tax-free allowance." The rate applied to any taxable interest mirrors your income tax band, meaning basic rate taxpayers are charged 20 per cent, higher rate taxpayers face a 40 per cent levy, and those on the additional rate are liable for 45 per cent. However, it's important to note that significant changes are on the horizon here. From April 2027, the rate levied on interest earnings will rise by two percentage points. This means basic rate taxpayers will see their rate climb to 22 per cent. Higher rate taxpayers will face an increase to 42 per cent, while those on the additional rate will be required to pay 47 per cent. Other changes taking effect from April 2027 could also push up the tax burden on your savings. The ISA allowance is being reduced. At present, savers can put £20,000 into ISAs and divide this between cash ISAs and stocks and shares ISAs as they wish. Under the new regulations, however, only £12,000 of the allowance can be allocated at your discretion. The remaining £8,000 must be directed towards stocks and shares ISAs. Nevertheless, many older savers will be exempt from these new regulations. Those aged 65 and above will keep the existing £20,000 allowance.