PERSONAL SAVINGS ALLOWANCE
Earn Up To £1,000 Savings Interest Tax-Free
Since April 2016, your savings interest has been paid to you tax-free, and 95% of UK adults no longer pay tax on any saving!
In the past, for every £100 interest earned, basic-rate taxpayers lost £20 in tax, higher rate £40. Yet now the new personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest without paying tax on it (higher rate £500), equivalent to the interest on £100,000 in the top easy-access savings account.
PSA IN FACTS & FIGURES
Q) How much is the personal savings allowance?
A) It depends on what rate of tax you pay:
Basic-rate (20%) taxpayers – will be able to earn £1,000 interest with no tax (so a max tax saving of £200 compared with before).
Higher-rate (40%) taxpayers – will be able to earn £500 interest with no tax (so a max tax saving of £200 compared with before).
Additional-rate (45%) taxpayers: £0 – they do not get an allowance.
The estimate is that it takes 95% of savers out of paying any tax on their savings. See the Treasury's factsheet for more information.
Q) How much can I have in savings before I exceed it?
A) Here's a table of how much you'd need in a standard savings account to hit the thresholds (assuming current best-buy rates).
How Much Can I Save Per Year Before Interest Is Taxed?
£40,000 + *
Assumes constant balance. * The max you can save at 1.5% is £20,000 but technically you can open two, see 5% savings loophole. Top accounts are updated monthly.
Q) Is it just interest on savings accounts that counts?
A) In short, no. Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is covered. This includes interest earned on other currencies (eg, US dollars, euros) held in UK-based savings accounts.
Peer-to-peer lending interest is also covered, but dividend income from shares or funds is not included in the allowance. It also includes interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts and most types of purchased life annuity payments.
Q) If I'm already saving into a tax-free account, is that interest covered by this allowance?
A)No. Interest that is already tax-free isn't included – so this includes ISA interest and Premium Bond 'winnings'. Interest from these will still be paid tax-free, it just won't count toward your PSA limit. So, if you get £500 in ISA interest, and you're a basic-rate taxpayer, you'll still have £1,000 of PSA to cover other interest.
Q) Can my savings within the personal savings allowance push me into a higher income tax band?
A) Simply, yes. However, the tricky question comes if your non-savings income, which would generally be income from work (whether employed or self-employed), is below the higher-rate threshold but your savings income would take you above it.
So do you get the £1,000 for basic-rate taxpayers or do you get the £500 for higher-rate taxpayers?
To work this out you first must add up your income from work and income from earned savings interest to get your total income. If that total income puts you in the higher-rate band (starts at £45,000 in 2017/18) then you are a higher-rate taxpayer and you only get the £500 of personal savings allowance (similarly for those at the additional-rate threshold – you wouldn't get the personal savings allowance at all).
Let's do an example...
The higher rate of tax starts on income above £45,000 (in the 2017/18 tax year). You earn £44,999 plus have £1,000 in savings interest. As your total income including interest is above the higher-rate threshold you'll only get the £500 personal savings allowance. So, £500 of your interest would be tax-free, while the remaining £500 would be taxed at the higher rate.
Q) How will I pay savings tax if I owe it?
A) HM Revenue & Customs has confirmed that any tax owing will be paid through changes to your tax code. So you'll get a lower personal allowance for income tax to pay any tax due on savings interest. Those who self-assess will continue to pay through that system (though a new digital system is replacing the annual tax return).
Your bank or building society will pay all savings interest due to you gross (without tax taken off the amount).
Q) When will my tax code change?
A) HMRC has now finished sending out 2017/18 tax codes. Some will have seen their tax code is lower than the standard 1150L, as HMRC already expects they will earn more in savings interest than their personal savings allowance covers.
If this has happened to you, and you won't earn more than £1,000 in savings interest (£500 for higher-rate taxpayers), contact HMRC as they will need to adjust your 2017/18 tax code to be correct.
Q) Is this allowance the same as my personal allowance?
A) This personal savings allowance is a radical departure for savings, creating it as a new tax bracket in its own right – within the income tax system.
You will get your savings personal allowance. It is completely separate from the personal allowance all taxpayers get on their standard income, where most can currently earn £11,500 before any tax is charged.
However, as mentioned above, if you do owe tax on savings interest, your personal allowance will be lowered from £11,500 so you pay the right amount of tax.
Q) Do the rules change if I'm a pensioner?
A) No, the same rules apply.
Q) What if I opened a fixed-rate bond before the PSA launched which matures soon?
A) The key about whether this is covered by the personal savings allowance or not is the ability to access the interest accruing on your account.
Almost all fixed-rate accounts don't let you touch either capital or interest during the term. So, if it's a three-year fixed-rate bond, which only pays interest when it matures in, say, January 2018, then interest would be covered by the personal savings allowance as the interest only became accessible to you after the introduction of the PSA.
Q) I'm a basic-rate taxpayer and my partner's higher rate. What personal savings allowance applies to our joint account?
A) In this scenario, the interest earned is assumed to be split down the middle.
You will get £1,000 of personal savings allowance, and your partner will get £500. So, if we assume interest earned on the joint account is £1,000, your remaining personal allowance will be £500 and your partner's will be used up. If they have other savings, they'll need to pay tax on any further interest.
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