A financial expert has explained how people can avoid paying unnecessary tax on their savings - and explained a £20,000 limit. In a rundown Matthew Jenkinfrom Which? consumer group said people can get caught out by savings tax on interest.

Speaking about what people need to watch out for in the new year he cautioned about paying 'unnecessary tax'. He said: "There is a limit to how much interest you can earn on your money before you face a tax bill. Basic-rate taxpayers can currently earn up to £1,000 in interest tax-free, higher-rate taxpayers £500, and additional-rate taxpayers get no allowance.

"So if you have a large sum toreinvest, opening a cash ISA can currently help you shield up to £20,000 a year from the claws of HMRC. From 2027, however, the amount you can hold in cash will fall to £12,000 for savers under 65. To use the full £20,000 ISA allowance, the remaining £8,000 would need to be invested in a stocks and shares ISA."

Martin Lewis, the well-known money-saving guru, recently explained that people earning between £12,500 and £50,000 per year could exceed the personal savings allowance limit if they hold significant savings.

The finance expert wasexplaining how to lawfully and legitimately reduce tax on savings through government-approved schemes. He made clear that tax is not charged on the savings deposits themselves, but rather on the interest generated from them.

And the issue is becoming more acute after Chancellor Rachel Reeves froze income tax thresholds for another three years in last November's budget. It means that For the 2025/2026 tax year, the standard Personal Allowance,the amount of income you can earn tax-free) is £12,570. Basic rate tax at 20 per cent is paid from £12,571 to £50,270.

The higher rate is paid at 40% on earnings from £12,571 to £50,270. Over taxable income of £125,140 the rate is 45%. The thresholds has been frozen since 2021 and now will continue until 2031, meaning millions of people will be forced to pay higher taxes by what is known as 'fiscal drag' as wages rise through inflation.

For those paying tax, he cautioned that interest from savings could be subject to taxation if it surpasses a particular threshold. He explained: "Talking about those people who are generally paying tax, the most important thing to understand is you will probably have a personal savings allowance.

"This is a special amount of savings interest that you can earn each year, which isn't taxed. Now if you're a basic rate taxpayer, a 20% rate taxpayer, which is generally someone earning between about £12,500 and £50,000 a year, then your personal savings allowance is £1,000.

That means you can earn £1000 of interest from any legitimate UK sources and you do not have to pay tax on it." Lewis noted that with the leading easy access accounts currently offering roughly 5 per cent interest, savers would need around £20,000 deposited to produce £1,000 in interest. Martin Lewis, the renowned money-saving guru, has offered some valuable insights on how tax applies to savings interest.

"So if you've got £20,000 or less in savings and you're a basic rate taxpayer, it is very unlikely that your savings interest would be taxed, so you don't have to pay anything so you can get on with it. If you're a higher 40% rate taxpayer, which is someone earning over around £50,000 up to about £125,000, then your personal savings allowance is £500 a year." Mr Lewis clarified that this means £10,000 in savings in a top easy access account would attract tax.

Mr Jenkin also said people who stick £10,000, for example, in a high street instant access account could miss out by hundreds of pounds. He said: "One of the biggest mistakes you can make when looking for the best home for your savings is limiting your search to the high street. The familiarity of a household name may feel safe, but breaking out of your comfort zone and choosing a smaller lesser-known provider could leave you better off."

He explained that smaller online operators often offered much more attractive rates and said data from Moneyfacts shows the gap in rates is widest on instant-access products. And he said the difference in interest could be more than £300 in a 12-month period for a sum of £10,000.

Mr Jenkin said: For example, if you invested £10,000 in a high street account paying 1.15% AER - the average high street rate - you could expect to earn £115 in interest over a year. But if that balance was invested in the top account for larger deposits you'd earn 4.48% AER and your annual interest income would increase to £448. That's a difference of more than £300. If you're nervous about saving with a bank or platform you've never heard of, there are some checks you can perform to ensure your money is protected."

Checking if the bank or platform is covered by the Financial Services Compensation Scheme (FSCS) is vital as it protects up to £120,000 of a saver's pot if it goes bust. Challenger banks have to abide by the same rules and regulations as other banks, but not all of them are FSCS-protected, he added.

To read the full Which? article click here.