Martin Lewis has issued a warning to state pensioners earning savings interest – because it could cost you your winter fuel payment. The Money Saving Expert founder has praised changes announced by government to the winter fuel payment system which means it is now universal again – i.e. being sent to every state pensioner automatically.

The old system, basing the eligibility on Pension Credit, has been scrapped and from this winter will be replaced by giving all state pensioners a £200 to £300 payment, and then those earning £35,000 or more will see their payment taken back from them in tax.

But, speaking on the latest episode of The Martin Lewis Podcast on BBC Sounds, Spotify and Apple Music, Martin Lewis outlined how state pensioners could lose their winter fuel payment this year thanks to the ‘cliff edge’ system due to savings interest.

That’s because savings interest is counted towards your £35,000 threshold even if it’s within the Personal Savings Allowance tax-free threshold, Martin warned.

Normally, basic rate taxpayers – i.e. those earning less than £50,270 per year – are able to make £1,000 per year in interest outside of ISAs without paying tax on the interest. So, for example, if you had £20,000 of savings in a 5% account, you would earn £1,000 of interest in a single year and owe no tax on it.

But, the interest DOES still count as income towards your winter fuel payment threshold even though it’s within the Personal Savings Allowance, Martin said.

Martin heard from a caller, Elaine, on his podcast who was asking if she would lose the winter fuel payment because she earns just under £35,000 but has savings, and whether she would lose it gradually or all at once.

Martin warned her: “This is a cliff edge. If you earn £35,000 and 1p, you lose the entire £200. It is not a graduated scheme, it’s a cliff edge scheme, it’s all or nothing.

“It is all of your earnings that are subject to Income Tax. That is any private pension, any state pension income, any employment income, any savings interest outside of an ISA. The interest you get inside an ISA doesn’t count, the interest outside an ISA does count.

“So, while the Personal Savings Allowance is an amount you are allowed to earn of savings interest tax free – as a basic rate taxpayer you can earn £1,000 of interest outside an ISA tax-free – that interest still counts towards your tax-free earnings for winter fuel payment.

“So let me just do a really simple example: you earn £1,000 of interest inside an ISA. Doesn’t count. You earn £500 of interest within your Personal Savings Allowance so you don’t pay tax on it. That £500 DOES count towards the £35,000 a year threshold.”

Martin added: “If you’ve got investment dividends outside an ISA, they count, if you get Carer’s Allowance, Incapacity Benefit and other taxable state benefits, they count.

“So what doesn’t count? The Winter Fuel Payment itself, investment income or savings income inside ISAs, your tax-free lump sum from your pension, capital gains don’t count, then non-taxable benefits like Disability Living Allowance, Personal Independence Payments and Pension Credit DON’T count towards your £35,000.

“If it’s generally taxable, it counts, if it’s generally not taxable, it doesn’t count.”