From April 2016 more than 95 per cent of the UK’s population no longer pay tax on their interest from savings as the result of the introduction of the Personal Savings Allowance (PSA).
Prior to the introduction of the PSA, for every £100 of interest earned, basic-rate taxpayers paid £20 in tax, while those on the higher rate paid £40.
Under the new rules taxpayers get an allowance based upon their tax band. The allowances offered are as follows:
Basic-rate (20 per cent) taxpayers – able to earn £1,000 interest tax-free
Higher-rate (40 per cent) taxpayers – able to earn £500 interest tax-free
Additional-rate (45 per cent) taxpayers – do not get an allowance.
What’s more if your total taxable income is less than £17,000 you won’t pay tax on any savings income. According to HM Revenue & Customs (HMRC), this means that the majority of savers will no longer pay tax on the interest they earn.
Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is covered by the PSA, including interest earned on other currencies held in UK-based savings accounts.
The new rules also cover peer-to-peer lending and interest distributions from authorised trusts, open-ended investment companies, investment trusts and most types of purchased life annuity payments, but not dividend income from shares or funds.
Interest that is already tax-free such as ISA interest and Premium Bonds are not included as they are already exempt and they won’t count towards an individual’s PSA limit.
HMRC has confirmed that any tax owing will be paid through changes to an individual’s tax code, meaning that taxpayers will get a lower personal allowance for income tax to pay any tax due on savings interest. Meanwhile, those who self-assess will continue to pay through that system.
HMRC has sent out 2016/17 tax codes to taxpayers and some may find that their tax code is lower than the standard 1100L. This is to take account of the fact that these taxpayers will earn more in savings interest than their personal savings allowance covers.
If this has happened to you, and you do not believe that you will earn more than £1,000 in savings interest (£500 for higher-rate taxpayers) this year, contact HMRC as they may need to adjust your tax code.