How to shield £17,500 interest from taxman

SAVERS face hideously complex tax rules on their nest- eggs after years of meddling by different Chancellors.

Money Mail receives a steady stream of emails and letters from readers who’ve been left puzzled. But if you’re savvy, you can use the rules to pay nothing in tax on up to £17,500 of savings interest.

You must grapple with no fewer than three allowances, as well as where your income comes from. The most muddling is the £ 5,000 starting rate band allowance.

It was introduced in April 2015 to help savers with lower incomes — such as pensioners, part-time workers, and nonworking adults — whose interest takes them above the normal personal allowance.

If your income (ignoring any interest from cash Isas) is below £17,500, you pay no tax on your savings interest.

The three ‘allowances’ you can claim from the taxman to cut your savings tax bill are the £11,500 personal allowance — the amount most people can earn no matter where the income comes from before paying tax — the £5,000 startingrate band allowance, and the £ 1,000 personal savings allowance. Altogether they total £ 17,500. Where your income comes from is also crucial to your number-crunching.

If, for example, you have a pension of £15,000 and £2,500 of savings income, all your interest is tax-free using the savings allowances. But you still pay £700 tax on £3,500 of your pension (£15,000 minus £11,500) as a basic-rate payer.

If your pension was below £ 11,500 you could earn savings interest that took your total income to £17,500 before you owe tax.

Even if your total income is slightly above the £17,500 mark, you won’t pay tax on all your interest. You can use some of the £5,000 starting band.

How much depends on how your income is split. If your pension is £15,000 and savings income £3,000 — a total of £18,000 — you will pay £100 tax (20 pc on £500) on your interest.

To work it out, you start with the £16,500 figure (the personal allowance of £11,500 plus the £5,000 starting rate). Deduct your pension which, in this example, leaves £1,500. You can then use your £1,000 personal savings allowance. The result is you pay tax on £500. If you get £16,500 from your pension or work, you don’t qualify for any of the starting rate band. But you still get the £ 1,000 personal savings allowance. Your bank, building society and National Savings tells HMRC how much interest you earnt each tax year — but not until November or December, seven months after the end of the tax year in April. Until then, it bases your tax code on the interest you earned in the previous year. If it changes, you can ask HMRC to update your tax code. You can do this online, by post at Pay As You Earn and Self-Assessment, HM Revenue and Customs, BX9 1AS, or by phoning 0300 200 3300 from 8am to 8pm, Mondays to Fridays, and 8am to 4pm on Saturdays. If you are due a refund, ask for form R40 or download it from