State pensioners can save as much as £147,250 in a savings account – even if it’s not an ISA – without paying any tax on it thanks to a little known HMRC scheme.

Those earning up to £17,570 a year can get access to a HMRC tax allowance which permits them to receive up to £5,000 of savings interest in a single year without owing the taxman any tax on the interest.

This can then be combined with the Personal Savings Allowance, currently set at £1,000 for a basic rate taxpayer, to give you a hefty, nifty £6,000 tax-free interest savings allowance.

But this doesn’t mean you can only save £6,000 before you pay tax on it, it means you can only receive £6,000 of interest without paying tax on it.

And if you had savings in a typical, average savings account at 4% for one year, you would be able to keep a mammoth £147,250 in that account for one year without owing any tax on the generated savings income, assuming you had no other savings or income.

Accounting for compound interest – where you gain interest on your interest – you can have £147,250 in a single savings account at 4% for one year, paying monthly interest, and you’d be left with £5,999 interest at the end of the year, £1 lower than your total tax allowances combined.

Martin Lewis explained on an episode of The Martin Lewis Money Show Live on ITV in March: “So imagine someone has £6,000 of savings interest a year. 

“Well clearly, if that’s all they had then all of it would be tax-free because of your tax-free Personal Allowance. We could also add in earnings of £7,570, that’s £12,570, all of that would be tax-free, that’s your Personal Allowance. 

“Now, let’s move that up to £12,570 and say the earnings take up all your Personal Allowance. Well, the Starting Savings Rate in this circumstance, you can have £5,000 in savings interest tax-free on top of your earnings, plus your Personal Savings Allowance, that £1,000 we talked about, so that’s £6,000.

“So that would mean you have £18,570 of combined earnings and savings interest totally tax-free.”

But every £1 you earned above £12,570 would then reduce your Starting Savings Allowance by £1. So if you earned £13,570 you could only earn £5,000 of savings interest, up until £17,750 where you lose all the starting allowance and can only earn £1,000 in interest.

Martin then added that this scheme is best for “lower earners with substantial savings”

He added: “That’s who it’s really good for. Which is often pensioners.”