The starting rate for savings, with worked examples, and why it changes inside top-slicing relief

The starting rate for savings is a band of savings income taxed at 0%. In 2026/27 it covers up to £5,000, but only for someone whose other taxable income is low: each pound of taxable wages, pension or similar income takes a pound off the band. For an adviser, the band has a second life. Inside top-slicing relief on an investment bond gain it is worked out again at a lower, notional income, for the relief calculation only, so it can be available there even where the actual-year calculation leaves none of it.

What the starting rate for savings is

Income tax is charged at the starting rate for savings, which is 0%, on savings income up to the starting rate limit, where that income would otherwise be taxed at the basic rate. The limit is £5,000. Savings income here means interest from banks, building societies and similar sources; a chargeable event gain on a life insurance bond is also savings income.

The band sits at the bottom of taxable income, straight after the personal allowance, and non-savings income fills it first. As gov.uk’s guidance on tax on savings interest puts it, every £1 of other income above the personal allowance reduces the starting rate for savings by £1. With a personal allowance of £12,570, non-savings income of £17,570 or more leaves none of the band. Dividends do not reduce it.

ITA 2007 s.7 · ITA 2007 s.12 · ITA 2007 s.16 · ITA 2007 s.18

It comes before the personal savings allowance

The personal savings allowance is a separate 0% band: £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer and nil for an additional-rate taxpayer. It applies to savings income above the starting rate limit. So savings income uses whatever is left of the starting-rate band first, then the personal savings allowance, and only then is it taxed at the saver’s ordinary savings rate. A basic-rate taxpayer with low earnings can therefore have several thousand pounds of interest taxed at 0% on top of the personal allowance.

ITA 2007 s.12A · ITA 2007 s.12B

Example 1: pension income and savings interest

A retired client has £14,000 of pension income and £4,000 of savings interest in 2026/27. The personal allowance covers the first £12,570 of the pension, so £1,430 of pension is taxable and the starting-rate band is reduced by that amount. What remains of the band takes the first slice of interest at 0%, and the personal savings allowance takes the rest.

All of the interest is tax-free; the only tax is basic rate on the pension above the personal allowance.

Example 2: the band fully eroded

Now take £20,000 of non-savings income and £2,000 of savings interest. Taxable non-savings income is £7,430, more than the £5,000 band, so none of the starting rate is left. The personal savings allowance still applies.

To run either case with your own figures, the income tax calculator shows the band-by-band working, including any income taxed at the starting rate for savings. The rates and allowances reference lists the current savings bands alongside the other thresholds.

The allowance it is measured against

The erosion is measured from the personal allowance the person actually has for the year, not the standard £12,570. Above £100,000 of adjusted net income the personal allowance is withdrawn by £1 for every £2, and once it has gone every pound of non-savings income counts against the starting-rate band. ParaplanAI’s engine applies the band on that basis, using the allowance after the withdrawal. That matters most for the shape of client below: modest pension income with a large bond gain on top.

ITA 2007 s.35

Why it changes inside top-slicing relief

Top-slicing relief compares the tax on the whole bond gain with N times the tax on an annual equivalent, the gain divided by the number of complete years (N). HMRC’s manual sets out how the savings bands are treated at the slice:

The personal allowance is also worked out at the notional income, for gains arising in 2018/19 onwards (IPTM3820). When the whole gain is in income it can withdraw the personal allowance entirely, which wipes out the starting-rate band as well. At that lower notional income the personal allowance is recalculated for the relief calculation only, so it can be higher, and the band larger, at Step 4 than in the actual-year calculation; the allowance in the actual-year calculation stays withdrawn.

Example 3: a bond gain on low other income

A client has £14,000 of pension income and no other savings. An offshore bond is fully surrendered in 2026/27 for a gain of £200,000 after 4 complete years. With the whole gain in income, total income is £214,000: the personal allowance is withdrawn in full, the pension uses up the whole starting-rate band, and the client is an additional-rate taxpayer with no personal savings allowance. With only the £50,000 slice included, income is £64,000: the full personal allowance applies for the relief calculation, and each year’s slice carries £3,570 of starting rate and £500 of personal savings allowance before any of it is taxed.

The slice reaches into the higher-rate band, so tax remains on it after the basic-rate credit that applies within the relief calculation (for an offshore bond, by ITTOIA 2005 s.531(1)). The recalculated starting-rate band and personal savings allowance take part of each slice out of tax altogether, which lowers the tax on the slice and so the relieved liability, and the relief is larger as a result. Carrying the full-gain figures of nil into Step 4 instead, the method for gains arising before 2021/22, would leave those amounts taxed. For gains arising in 2018/19 to 2020/21 the personal allowance was still recalculated at the slice; only the personal savings allowance and the starting rate for savings were carried through.

The top-slicing relief calculator runs this recalculation and prints the personal savings allowance at both steps. The guide to top-slicing relief and the savings allowances works a higher-income case where the personal savings allowance moves, and how to calculate top-slicing relief walks through all five steps. For planning and illustration only; this article does not constitute financial or tax advice.

IPTM3820 · ITTOIA 2005 ss.535–537 · ITTOIA 2005 s.531