The personal savings allowance will come into force in the 2016/2017 tax year which starts on the 6th April.
It determines how much taxpayers can earn in savings interest before they have to pay tax.
Projections suggest that this will mean that 95% of savers will no longer have to pay tax on their savings.
How is the personal savings allowance different?
At the moment, a Basic Rate (20%) taxpayer pays £20 for every £100 saved in tax. This figure rises to £40 for every £100 saved if you are a Higher Rate (40%) taxpayer.
The new personal savings allowance is also determined by your tax bracket, as follows:
- Basic Rate (20%) Taxpayers – can earn up to £1,000 in savings interest before they pay any tax
- Higher Rate (40%) Taxpayers – can earn up to £500 in savings interest before they pay tax
- Additional Rate (45%) Taxpayers – this scheme is not applicable to this tax band, so there is no allowance for savings income.
The actual amount of savings you can have before you go over the threshold depends on the type of account you have and your tax bracket.
What if my savings push me over into the next personal savings allowance category?
This can happen, you could just tip over from Basic Rate to Higher Rate with the new savings. It is essentially a simple calculation:
Work Income + Savings Interest Income = Total Income
If the Total Income figure is within the Higher Rate tax band, then you will get the smaller £500 Personal Savings Allowance.
Is this replacing the Personal Allowance?
No, they have similar names but are different parts of the same system.
- Personal Allowance – the amount you can earn before you pay any income tax. Currently £10,600, rising to £11,000 in April 2016.
- Personal Savings Allowance – the amount you can earn from interest on savings before you have to pay any tax. Completely new, coming into effect from April.
What types of interest are included in the personal savings allowance?
It’s not just interest earned from savings accounts; the Personal Savings Allowance also includes interest from:
- corporate bonds.
- credit union accounts.
- interest distributions from investment trusts, open-ended investment companies and unit trusts.
- building societies.
- peer-to-peer lending.
- bank accounts.
- government bonds and gilts.
- other currencies in UK-based accounts.
- most life annuity payments.
Are fixed rate bonds counted as part of the personal savings allowance?
This is slightly confusing as it depends on when you have been able to get at the interest income from the bonds. Most fixed rate bonds are locked down until their official ‘end’.
Therefore, a 1-year, fixed-rate bond that matures in June would be considered part of your Personal Savings Allowance because you couldn’t access the interest payment before the commencement of the new scheme.
What about joint accounts held by partners that are in different tax brackets?
Good question! In this instance, the interest payment is split 50/50 and that amount deducted from each individual’s Personal Savings Allowance accordingly. For example, one partner is a
Basic Rate taxpayer and the other is a Higher Rate taxpayer. They earn £800 interest in total on their joint account, which is divided between them at £400 each.
The Basic Rate taxpayer still has £600 of their £1,000 Personal Allowance left and the Higher Rate taxpayer only has £100 of their £500 Personal Allowance.
What is not included in the personal savings allowance?
- Income from shares’ or funds’ dividends
- ISA interest
- Premium Bond winnings
The last two are a real winner because it means that you can still earn your £300 tax-free ISA interest and have your full £1,000 Personal Savings Allowance to apply elsewhere (if you are a Basic Rate taxpayer, £500 for Higher Rate Taxpayers).
So I should keep my ISA then?
We don’t yet know what impact the new Personal Savings Allowance will have on the ISA market.
But, right now, it is still a very competitive product that has a lot of positives for many taxpayers.
They often have higher savings rates, are more flexible than the fixed-rate ‘can’t touch it’ savings accounts and protect cumulative savings from being taxed.
It is important to consider all the factors of your financial situation in order to choose your best savings options.
How do I pay any tax I owe on savings interest?
If you are already part of the Self-Assessment system, then you will continue to declare your tax liability in this way. Financial establishments now pay your savings interest without any tax deductions and any tax you owe on savings interest will be paid through a change in your tax code.
HMRC have sent out the 2016-17 tax codes, which you need to check carefully. If you have the wrong tax code you could end up paying too much or too little tax. HMRC has already accounted for some taxpayers earning more than their Personal Savings Allowance in savings interest and have issued a lower tax code (the standard one is 1100L currently).
This is why you must check your code, if you are not going to be earning over your Personal Savings Allowance, but have received a tax code with that assumption, then you must contact HMRC so they can correct your code.
Tony Shanks