Will your savings stop you getting the Winter Fuel Payment?

The last couple of years have seen savings rates heat up, but pensioners who earned bumper returns could find themselves frozen out of receiving this year's Winter Fuel Payment.

That's because interest from savings held outside of tax-free Isas count towards the new £35,000 income cap. The Winter Fuel Payment is designed to help pensioners cover heating costs, but higher savings income could push you over the limit. 

Here, Which? explains how your savings interest is calculated, what could tip you over the threshold and how to reduce your taxable income.  

Who gets the Winter Fuel Payment?

The Winter Fuel Payment is a tax-free annual sum to help pensioners cover energy costs during colder months. It’s typically worth £200 per household, or £300 if someone is aged 80 or over, and is paid automatically between November and January.

Until winter 2023-24, it was paid universally to almost all pensioners. But for winter 2024-25, it was restricted to those on income-related benefits such as pension credit – which narrowed the eligibility criteria significantly.

From winter 2025-26, the payment will once again be available to a wider group, using a fixed income threshold to determine eligibility. Pensioners with a taxable income of £35,000 or less will keep the full payment. That includes state and private pension income, as well as savings interest and dividend payments.

If your income is above the threshold, HMRC will automatically recover the payment through your self-assessment tax return or PAYE (Pay As You Earn). If you know you’ll exceed the threshold, you’ll be able to opt out to avoid the payment altogether. The Department for Work and Pensions is developing a system to allow this, with details to follow.

The Scottish government has also announced that it will apply the same £35,000 income threshold to its Winter Heating Payment from this year. In Northern Ireland, the Executive has confirmed that the Winter Fuel Payment will also be reinstated for winter 2025-26, using the same income threshold as in England and Wales. 

• Find out more: more pensioners to receive the Winter Fuel Payment

Savers with top rates could miss out

Savings rates have soared over the past couple of years, with the best one-year fixed-term deal peaking at 6.2% in October 2023. Rates are now steadily falling, following cuts to the Bank of England base rate, but savvy savers who locked in one of these market-leading deals will have earned bumper returns. 

The downside for pensioners is that interest earned on savings held outside an Isa counts as taxable income — and it could tip you over the £35,000 income cap for receiving this year’s Winter Fuel Payment.

For example, if your combined state and private pension income is £34,000, and you have £22,000 in a one-year fixed rate bond at today's top rate of 4.51% AER, then the annual interest of £1,013 would push your total income over the threshold by just £13. 

The larger your savings pot, the higher your annual interest — and the greater the risk of missing out on the payment.

It's also worth noting that even if your interest stays within your Personal Savings Allowance (£1,000 for basic-rate and £500 for higher-rate taxpayers), it's still considered taxable income and will be used when calculating your eligibility.

• Find out more: best savings rates 2025

Shield your savings in a cash Isa

One of the most effective ways to stop savings income from affecting your Winter Fuel Payment is to use a cash Isa. 

You can save up to £20,000 a year in one of these accounts without paying a penny to HMRC – and, because returns aren't taxable, it won't affect your eligibility for the payment. 

The table shows the best instant-access and fixed-term Isa accounts, ordered by rate. We've excluded any accounts that impose restrictions on opening and withdrawals.

• Find out more: best cash Isas 2025

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Are cash Isa rates worse?

There's a common belief that choosing a cash Isa means accepting a lower rate in exchange for the tax-free savings allowance. That's often true for for fixed-term accounts, but not always for instant-access deals.

Take Vanquis Bank, for example. It currently offers the top one-year fixed-rate savings account at 4.51% AER. Its one-year cash Isa equivalent also tops the Isa chart, but pays a lower 4.29%.

Looking at the wider market, Moneyfacts data shows average one-year fixed-rate bonds have consistently beaten their cash Isa counterparts every month for the past two years.

But it's the exact opposite for instant-access products. Over the same period, cash Isas have offered higher average rates than equivalent easy-access savings accounts. 

Out of the current deals, Tembo Money's restriction-free instant-access cash Isa is a market-leading 4.64% AER, compared to Cahoot's traditional instant-access account offering 4.55%.

You can find instant-access rates as high as 5% AER, but they come with significant strings attached – such as restrictions on who can open an account, low maximum-deposit limits and limits on withdrawals.

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• Find out more: savings accounts vs cash Isas

How else can you reduce your taxable income?

To assess whether you're eligible for the Winter Fuel Payment, you'll need to consider all forms of taxable income — including payments from both annuities and pension drawdown plans.

While income from an annuity is fixed and can't be adjusted, making the most of drawdown pension rules could help you stay below the £35,000 limit.

You can usually take up to 25% of your pension pot tax-free as a lump sum. Instead of taking this in one go, you can also access it gradually — with 25% of each withdrawal treated as tax-free and the remaining 75% subject to income tax. 

Any funds you don't withdraw stay invested in your pension, growing tax-free. This means you can hold off drawing income you don't need and take tax-free cash in chunks when it suits you. 

• Find out more: pension drawdown explained