Martin Lewis

I'm locking in on B. OK, you're locked in.

Right.

Adrian says it's 20% of £3,400.

Now, there is the personal savings allowance, which I suspect many listeners will know about, which says a basic rate taxpayer can earn £1,000 of interest a year on any form of savings without being taxed.

So with the normal personal allowance and the personal savings allowance, that would mean you would only pay 20% of tax on £3,400, not £4,400.

So if that were it...

You would be right, Adrian, but you're not.

Why did you do this?

Well, because I was hoping that I'd give you at least... You didn't even get half the answer I was expecting you to get, which was to say that the personal savings allowance is £1,000.

What's missing in this one is there is another allowance that people don't know about.

It is called the starting savings allowance.

And what happens with the starting rate of savings is if you have...

high savings interest and low earnings, then it is a special allowance that means up to the first £5,000 of your savings interest can be tax-free, plus you get the personal savings allowance on top.

And the way they set this scenario up, which was a £12,500 pension, and of course pensions are taxable income,

so that's all taxable income, and £4,400 savings interest, again, taxable income.

It would all be covered by the starting savings allowance, which means the correct answer, I'm delighted to say, is A, in that circumstance, you would not pay any tax.

You got it wrong, Adrian, but I'll be explaining the starting rate of savings a little bit more in the podcast for anyone in that circumstance, and they will get it right because it means they'll pay less tax.

Thank you very much, Martin.

OK, I've moved into podcast only mode and I just want to explain how the starting rate of savings works in a little bit more detail.

Effectively, the rule is above the personal allowance, so £12,570, you can earn £5,000 of interest only from savings.