The amount of interest you can earn on your savings before tax is payable changed on 6 April 2016, due to the introduction of the Personal Savings Allowance (PSA).
How much is the PSA?
Your PSA depends on your income and whether you’re a basic, higher or additional rate tax payer:
How much is the PSA?| Highest rate of income tax you pay | Personal Savings Allowance |
| Basic | £1,000 |
| Higher | £500 |
| Additional | No entitlement |
If your total taxable income is less than £17,000 you don’t pay tax on any income earned from savings.
“Around 1.4 million individuals are expected to still have some tax to pay on their savings income after the PSA has been introduced. Most will be additional rate taxpayers or individuals with higher than average savings.” HM Revenue & Customs, December 2015
What counts as ‘savings income’?
You should be aware of the types of savings income that may use up part of your PSA. Savings income includes:
- interest from savings accounts held with banks, building societies, NS&I and credit unions
- interest distributions from authorised unit trusts and open-ended investment companies.
Some other types of income such as purchased life annuity payments, and gains from certain types of life insurance contracts may also use up part of your PSA.
How can you minimise the amount of tax you pay on savings interest?
Income earned from an Individual Savings Account (ISA) will not use up any part of your PSA.
It’s important to make sure that you maximise your annual tax-free ISA allowance, as this allows you to shelter larger amounts of savings from tax over time. You can save up to £15,240 in an ISA in the 2016/17 tax year.
It’s particularly important to do this if you are an additional rate tax-payer, as you do not qualify for a PSA.
How will any tax due on savings interest be collected?
When the PSA was introduced, banks, building societies, and National Savings and Investments (NS&I) stopped automatically taking income tax from the interest earned in savings accounts. Banks and building societies will give HM Revenue & Customs the information they need to collect any tax payable. This is normally be done by changing your tax code.
If you are self employed, or usually fill in a self assessment tax return you should continue to do this.
Some interest, such as that earned from Unit Trust and Open-ended Investment Company (OEIC) Funds, will continue to have tax deducted at 20%. If you hold these types of account, and need to either claim the tax back, or pay more tax, you will usually need to do so through a tax return.
“If you’re ready to discover more about how to make your savings work harder, download: ‘Selecting the right savings account: 3 essential considerations’.
Alternatively, if you would like to discuss any aspect of your personal finances with a Financial Consultant, call us on 0800 316 3788.