Some of us may have thought that the chancellor was in a good mood when he introduced the Personal Savings Allowance (PSA). The Government predicts that the measure will result in 95% of taxpayers not having to pay any tax on their savings income.
As a result of the introduction of the PSA, banks and building societies will pay interest gross. The Government expects the average tax saving per person per year to be £25. With effect from 6 April 2016 depending on whether you are a basic rate tax payer (taxable income less than £43,000) or a high rate (taxable income up to £150,000) then you can earn a certain level of income on your savings tax free.
For basic rate tax payers the amount is £1,000 and for high rate tax payers this is £500. If your taxable income is less than £17,000 then you will not pay tax on any savings income.
Savings income includes account interest from:
- bank and building society accounts
- accounts with providers like credit unions or National Savings and Investments
- interest distributions (but not dividend distributions) from authorized unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
How does it work
To help understand how the PSA works we have given an example for a basic and high rate tax payer
- Example – Basic rate
James earns £25,000 a year and gets £1,750 in bank interest.
As the first £1000 of the bank interest is covered by the PSA then the remaining £750 will be taxed at 20%
- Example – Higher rate
Sarah earns £85,000 a year and gets £2,500 in bank interest.
As the first £500 of the bank interest is covered by the PSA then the remaining £2,000 will be taxed at 40%
How does it impact me
It is expected that HMRC will amend individual’s tax codes, so for example if you earn a salary then it will be collected that way.
Additional rate tax payers who have significant savings and therefore cannot benefit from the PSA will be declaring the gross income received on their self-assessment tax returns and might want to consider the cash flow implications.
It is also worth considering that where individuals do not submit tax returns the cash flow implications as HMRC will be collecting tax through the PAYE coding system.
An important point of note is that interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
It is therefore, worth considering how and where cash is invested since ISA interest is tax free but will it be easier and simpler to leave the cash in your bank or building society savings account as the interest received may be covered by the PSA.
Where can I get help
Wisteria are a firm chartered accountants and have advised individuals and companies on tax efficient planning, if you would like to know more then please contact Nick Tagg or Esther James on 02080 429 9245.