"How the starting rate for savings works" MSE article - inconsistency?

jim0101

Article updated 10 December 2024 by Helen Saxon (unable to provide a link as a newbie)  says:

3. Your personal savings allowance. This is worth up to £1,000. The personal savings allowance (PSA) means everyone who pays basic 20% rate tax (so those who earn more than the £12,570 personal tax allowance but less than the £50,270/year limit for the higher rate of tax) can earn £1,000/year in savings interest before paying any tax on it.

It then goes on to give an example:

Cheryl: No income from work, has £20,000 of savings income
In this scenario, Cheryl will need to pay tax of just £286. As she has no earned income, the savings interest is mostly covered by a combination of allowances:

• Personal allowance – the first £12,570 is tax-free

• Starting savings rate – the next £5,000 is tax-free, so now £17,570 of the interest income is taxed at 0%

• Personal savings allowance – means the next £1,000 is tax-free, so £18,570 is taxed at 0%.

The first quote defining the allowance says that those who earn more than  £12,570 /year can earn  £1,000/year in savings interest before paying any tax on it. The second quote with Cheryl's example says that Cheryl has no earned income. If she has no earned income then why does she qualify for the allowance as defined?

eskbanker

You're taking the first quote out of context - those such as Cheryl with earned non-savings income below the £12,570 personal tax allowance (or even those earning up to £17,570) use the starting rate for savings before the PSA comes into play, so you need to read the whole explanation rather than extracting a bit of bullet point 3 in isolation:

If you earn a decent amount of interest on your savings, and you have a low income from work or from your pension, there are three allowances you need to understand to see how you’re taxed...

1. Your personal allowance. This is the amount you can earn, whether from work or savings interest or owt else, and not have to pay income tax.
   
   For most people this allowance is £12,570 (for 2024/25), though it can be higher or lower. 
   
   Whatever it is, this is the base point for the other allowances. For example, if yours is higher because you get the additional personal allowance for being blind, then everything else is on top of that (though we’re going to stick with the typical £12,570 in our examples).
   
   
2. A £5,000 starting rate for savings. Here those on lower incomes get an extra tax-free allowance of up to £5,000 for their savings.
   
   - If your income from pension or work is under the personal allowance (£12,570), you get the full £5,000, meaning you can earn up to five grand in savings interest without being taxed.
   
   - If your income from pension or work is above the personal allowance (£12,570), you lose £1 of the £5,000 starting rate for savings for each £1 you earn above the personal allowance.
   
   - If your income from pension or work is £17,570 or more. You don’t get any of the £5,000 starting rate for savings.
   
   
3. Your personal savings allowance. This is worth up to £1,000. The personal savings allowance (PSA) means everyone who pays basic 20% rate tax (so those who earn more than the £12,570 personal tax allowance but less than the £50,270/year limit for the higher rate of tax) can earn £1,000/year in savings interest before paying any tax on it.
   
   This is added on top of the £5,000 starting savings rate. So, if you're on a low income, you're able to earn up to £5,000 savings interest without paying tax but you'll also pay no tax on the next £1,000 of savings interest – using up your personal savings allowance.

https://www.moneysavingexpert.com/savings/tax-free-savings/