The new Personal Savings Allowance (PSA) – I know another abbreviation! will come into effect in the new tax year in April 2016. The Chancellor George Osbourne stated it will take 95% of taxpayers out of savings tax altogether.
So what is it and will it affect you?
- How much is the Personal Savings Allowance: It depends on what rate of tax you pay- Basic-rate (20%) taxpayers – will be able to earn £1,000 interest with no tax, Higher-rate (40%) taxpayers – will be able to earn £500 interest with no tax and Additional-rate (45%) taxpayers: £0 – they will not benefit from the allowance.
- What Income is eligible: All interest earned from Banks, Building Societies, savings accounts and credit unions, but dividend income from shares is not included
- How much would you have to save to pay tax: From a savings account paying 1.5%, a basic rate tax payer would have to have a balance of £66,666 for a year before earning enough to pay tax (£1000) and a higher rate taxpayer a balance of £33333 (£500)
- How the process will work-Currently Banks & Building Societies deduct tax at source at 20% unless you submit an R85 to confirm you are a non-tax payer. From April 2016 they will not deduct any tax on your eligible savings, but at the time of writing, it has not been confirmed how you will pay the tax on amounts over this-but perhaps the new online digital systems that are replacing tax returns will be utilised.
- Do you need to do anything: Most people will not need to do anything, whether they are basic rate taxpayers with savings income below £1,000, or higher rate taxpayers with savings income below £500. Their bank/building society will simply stop deducting tax on the interest they pay..HMRC recently said “In the small number of cases in which this is not possible, we are looking at a range of options to make it easy for customers to pay the tax that is due, again using the information provided to us by account providers. Further information will be provided in good time, before any tax is due.”
- Will the allowance replace the Cash ISA-It certainly appears that the Cash ISA may be used less going forward, however Cash ISA’s will always be useful if you earn more interest than your new tax free allowance, as the allowance is in addition to your Cash ISA allowance and it’s important to remember that the Cash ISA’s remain tax free as they grow and they normally attract a higher rate of interest and of course additional rate tax payers don’t get the new allowance.