From April 6, 2016, the majority of UK adults will be able to earn £1,000 worth of interest on their savings per year without paying tax on the interest. Higher rate taxpayers can earn up to £500. This allowance is called the Personal Savings Allowance.
This savings shake up means 95% of people won’t pay tax on savings and their banks and building societies will no longer deduct tax from account interest. Those who already get tax-free interest no longer need to advise their bank when applying for an account.
However, it can alter the tax bracket someone falls into dependent on their current income.
Savings income involves interest from bank and building society accounts as well as accounts with providers such as credit unions or National Savings and Investments. There are also various other modes of income which qualify under the umbrella of savings income including interest distributions from authorised unit trusts, investment trusts, income from government or company bonds and the majority of life annuity payments. Interest from ISAs doesn’t count towards your PSA as it’s already tax-free.
Specifically those earning up to £43,000 on basic 20% tax rate will be able to hold £1,000 in savings income tax free. Those earning from £43,000 to £150,000 will fall into the higher rate tax bracket of 40%.
At the additional rate threshold of £150,000 – you wouldn’t get the personal savings allowance at all).
For the majority of people, it is better to put your money in a top-rate ISA and then use the personal allowance after that. For one thing, money in a cash ISA is protected year after year regardless of tax code.
Additionally, while the allowance currently looks large now, if interest rates go up as much as they were pre credit crunch then they could go up to 7% and the tax-free allowance would be earned on just £14,000 worth of savings for a basic rate taxpayer and £7,000 for a higher rate taxpayer – which is less than a year’s ISA money. Cash ISAs also get better savings rates than normal current accounts. If one partner dies, spouses can inherit the ISA money and the tax free status remains. You won’t inherit their personal savings allowance.
So before you move all your money over immediately, take these points into consideration!
How to Claim
To claim your Personal Savings Allowance no action is required. HMRC will normally collect tax by changing your tax code and banks and building societies will provide all the information needed by HMRC.
If you fill in a Self-Assessment tax return you should keep doing that as usual and then any tax owing will be paid through changes to tax code. HMRC is sending 2016/17 tax codes out at the moment and if yours is lower than the standard 1100L, HMRC expects you will earn more in savings interest than your personal savings allowance covers.
Should this happen to you and you won’t earn more than £1,000 in savings interest then contact HMRC as they will need to adjust your 2016/17 tax code to be correct.
For more help on Personal Tax Allowance and other personal financial circumstance changes get in touch with Pareto FP, independent financial planners on 0161 819 1311.