New Personal Savings AllowanceLeave a Comment
The new Personal Savings Allowance (PSA) was introduced on 6 April 2016. If you are a basic rate taxpayer, you can earn up to £1,000 of interest, tax free and a higher rate taxpayer can earn up to £500 of interest, tax free.
Additional rate taxpayers are not entitled to any PSA. The PSA is completely separate from and in addition to the tax free savings that you can hold in an Individual Savings Account (ISA). From April 2016, Banks and Building Societies are no longer deducting tax from the interest that they pay to us, and this applies to interest paying current accounts as well as savings accounts.
The government have estimated that 95% of people will not pay any tax on their interest income as a result of the introduction of the PSA. If you do owe some tax on interest and do not already complete a self-assessment tax return, HMRC have said that they will collect this by adjusting your tax code. If you don’t have any PAYE income, HMRC have said that they will write to you in the Autumn to explain how they can help you pay any tax due on interest income.
The PSA does not work in the same way as the personal allowance. It does not reduce your taxable income, but simply taxes part of it at 0%. The different levels of PSA available to basic rate, higher rate and additional rate taxpayers can create some anomalies, where £1 of additional income can make you worse off!
John has earnings of £42,000 and has interest income of £1,000. Jonathan has earnings of £42,001 and interest income of £1,000. Earning just £1 more leaves him with £99.40 less money in his pocket.
|2016/17||John||John’s Tax||Jonathan||Jonathan’s Tax|
|31,000 @ 20%||6,200|
|31,001 @ 20%||6200.2|
|PSA £1,000 @ nil||0||N/A|
|PSA £500 @ nil||0|
|£499 @ 20%||99.8|
|£1 @ 40%||0.4|
|Total tax bill||6,200||6,300.40|
|Cash in pocket||£36,800||£36,700.60|
Hopefully the situation outlined above is going to be relatively rare. However, if you are near the limit above which you move into either higher or additional rate tax,it might be worth considering the following to reduce your taxable income:
- Moving an interest-bearing account into your spouse’s name
- Making a charitable donation
- Making a pension contribution
- Reducing or delaying dividend payments from your personal company
However, any planning must be done in the tax year in question as the personal savings allowance can only be used in the year. There is no facility to carry any unused amounts forward or back, and the allowance itself cannot be transferred to a spouse.
If you require any help with this or any other aspect of tax planning, Julia Clarke, Director of Taxation at Wright Vigar, or one of our team of professionals in your local office would be pleased to help. Simply give us a call on 01522 531341 or email us at firstname.lastname@example.org.