The Personal Savings Allowance is coming

Smart Money Secrets

A chance to keep more of the interest from your savings

A radical new government initiative for UK savers comes into force from the beginning of the 2016/17 tax year with the introduction of the Personal Savings Allowance (PSA).

The PSA will apply to all non-ISA cash savings and current accounts, and will allow savers to receive a generous portion of their interest totally free of tax.

Currently all bank and building society interest is paid “net” – after 20% tax has been deducted – apart from ISAs. However that all changes from 6 April 2016 when everybody will receive their interest payments “gross”, i.e. without any deductions.

As a result, it is expected that around 95% of savers will receive their interest tax-free, which is an instant boost of 20% on savings income.

The amount of tax-free interest you will be entitled to under PSA will be based on your annual taxable income, as follows:

• For those earning less than £42,700, i.e. basic rate taxpayers, there will be no tax payable on the first £1,000 of savings interest earned each year.
• The tax-free allowance for those in the higher-rate tax bracket (earning between £42,701 and £150,000) is lower at £500.
• People in the 45% tax band (those with an income above £150,001) are currently not entitled to the PSA.

It’s refreshing to see that lower earners will benefit from the largest allowance and, after years of putting up with pitifully low savings rates, the PSA is a welcome but long-overdue boost to UK savers.

There are still further guidelines and finer details of the PSA workings to be released by the Government and HMRC, but in the meantime, it’s worth understanding the sort of balances you’ll be able to maintain and remain within your PSA.

[table width=”100%” style=”table-striped table-bordered” responsive=”true”]
[table_head]
[th_column]Interest rate on your savings[/th_column]
[th_column]Max tax-free balance for a basic rate taxpayer (interest £1,000 tax-free pa)[/th_column]
[th_column]Max tax-free balance for a high rate taxpayer (interest £500 tax-free pa)[/th_column]
[/table_head]
[table_body]
[table_row]
[row_column]1.50%[/row_column]
[row_column]£66,660[/row_column]
[row_column]£33,330[/row_column]
[/table_row]
[table_row]
[row_column]2.50%[/row_column]
[row_column]£40,000[/row_column]
[row_column]£20,000[/row_column]
[/table_row]
[table_row]
[row_column]3.50%[/row_column]
[row_column]£28,570[/row_column]
[row_column]£14,285[/row_column]
[/table_row]
[table_row]
[row_column]5.00%[/row_column]
[row_column]£20,000[/row_column]
[row_column]£10,000[/row_column]
[/table_row]
[/table_body]
[/table]

The figures above assume a savings account in a sole name; however for joint accounts the allowance and thus the balances you can keep are doubled.

Note that savers with bigger savings pots who will generate more than their annual maximum tax-free interest allowance can still shelter a further £15,240 per person in a tax-free ISA during the 2016/17 tax year.

So even though cash savings rates remain at historically low levels at least there’s a bit of positive news and some extra income on the horizon.

Article by Andrew Hagger
Independent Personal Finance Analyst
www.moneycomms.co.uk