Personal finance expert Martin Lewis has today flagged up a ‘hole’ in the tax system – which strangely means that people would be ‘better off’ earning less interest on their savings. The Money Saving Expert founder said that people will ‘literally have more money in your pocket if you earn less interest.’

He was speaking about people who are in the threshold to the higher 40 per cent tax rate which starts at £50,270. All the money earned before that, after the first £12.570 is taxed at 20%. Hesaid: “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 60%, but at the same time, your personal savings allowance, the amount you could earn from savings outside of an ISA each year, drops from £1,000 pounds a year of interest tax free to £500 pounds a year of interest tax free, and that is what causes this hole.”

This means that if you’re earning more than £50.,270 then you can have £10,000 in savings at a rate of 5% before you start paying tax.

Mr Lewis gave his followers on X two scenarios: “Here’s the first one. You’re earning from work £49,300 a year and you’re earning exactly, because it makes it easier, £1,000 pounds in interest from your savings outside of a cash ISA. That means you have total earnings of £50,300, and even though some of those earnings are from savings, that will push you into the higher rate tax threshold.

“Remember it was £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’s uh that’s left is £200, so you’re going to pay tax of £200 on your savings, which means your total interest is £800. Remember that.”

In the second scenario, Mr Lewis said that the person was earning the same amount – £49,300 a year. He said: “The only thing I’ve changed here is I’ve. Drop the interest you earn each year from £1,000 to £950. So now your total earnings are £50,250, which is £20 lower than the higher rate tax threshold.

“That means your personal savings allowance is still £1,000. So all of your interest is tax-free, which means you take home £950 interest. You take home £150 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.

“There are lots of annoying things. In the income tax system, certainly for those people who earn £100,000 and lose their personal allowance, and their marginal tax rate gets higher, but still then earn more, take home more. With this one, earn more interest, and it’s very niche, it won’t affect many people, but it is fascinating, earn more interest, take home less.”

Some of his followers came up with a different solution and Martin acknowledged: “Many correctly pointing out that you could fix this by a £50 donation to charity (with gift aid) or same increased in pension contributions, bringing your earnings below the high income threshold.

“That’s quite right, I probably could’ve put it in there, but I was more focused on explaining the glitch and my sexy graphics!”