From 6 April 2016, the Government is introducing a new Personal Savings Allowance. This will allow basic rate tax payers in the UK to earn up to £1,000 of interest on their savings without paying tax on it. Higher rate tax payers will be able to earn up to £500 of interest tax-free.
As a result of this change, the Government estimates that most people in the UK will no longer pay tax on savings.
The Personal Savings Allowance covers interest income from bank and building society accounts and accounts with providers like credit unions or National Savings and Investments.
Interest from Individual Savings Accounts (ISAs) is already tax free and so it isn’t included when arriving at your Personal Savings Allowance. Effectively, tax-free interest on your Personal Savings Allowance is over and above any interest earned in an ISA savings product.
You don’t need to do anything to claim your Personal Savings Allowance. From 6 April, banks and building societies will automatically make interest payments to customers without deducting tax.
HMRC will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do this at the end of the tax year. However, HMRC advise that if you already fill in a Self Assessment tax return you should carry on doing this as normal.
Your interest income will depend both on the amount of savings you have and the interest rate that you are earning. From the table below, for example, you can see that £50,000 of savings earning interest at 2.00% would earn £1,000 interest a year.
|Interest rate||Interest earned|
It’s important to remember that interest earned on ISA savings products is always tax-free - now and in the future - no matter how substantial your ISA savings are. For people with a long-term outlook, looking to build a tax-free lump sum over time or those with large amounts of savings now, ISAs will continue to be a key part of their portfolio. In addition, if interest rates climb back up to 5%, you could earn the Personal Savings Allowance with £20,000 of savings – so it makes sense to think carefully before abandoning your ISA.
For more information about The Personal Savings Allowance, visit gov.uk - www.gov.uk/government/publications/personal-savings-allowance-factsheet/personal-savings-allowance