Martin Lewis has posted a new update on the HMRC 'tax hole' where earning more means you take home less. In a new update, he says: "Okay, this is quirky and it's geeky, but there is a hole in the tax system, which actually means at one point, you are better off earning less interest on your savings rather than more.
"You will literally have more money in your pocket if you earn less interest."
He goes on to explain: "it all starts because the rate at which you pay higher rate tax is £50,270 for each pound you earn. After that, the tax increases from 20% to 40% so you only take home 60p but at the same time, your personal savings allowance, the amount you can earn from savings outside of an ISA each year, drops from £1000 a year of interest tax free, to £500 a year of interest, tax free.
He then describes two scenarios. In the first one, someone is earning £49,300 a year in their pay packet, and £1000 from interest.
"That means you have total earnings of £50,300," he says. "And even though some of those earnings are from savings, that will push you into the higher rate tax threshold.
"Remember, it's £50,270 that means your personal savings allowance drops to £500, so you will have to pay 40% on the rest above £500, and 40% of the £500 that that's left is 200 quid.
"So you're going to pay tax of 200 quid on your savings, which means your total interest is £800 pounds."
In the next scenario, they only earn £950 interest, so their total earnings are £50, 250.
"That's 20 quid lower than the higher rate tax threshold," he says. "That means your personal savings allowance is still £1000. So all of your interest is tax free, which means you take home 950 quid interest. You take home 150 quid interest more than you would have done if the total interest you earned was 50 quid higher.
"It's totally bonkers. It should not work like that, but it does work like that, and it is one of the very few points in the income tax system where if you earn more, you take home less.
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"There are lots of annoying things in the income tax system, certainly for those people who earn £100,00 and lose their personal allowance and their marginal tax rate gets higher, but still then earn more and take home more."
He admits it's very niche.
"It won't affect many people, but it is fascinating," he reflects. "Earn more interest, take home less."