What you need to know about the Personal Savings Allowance

From 6 thApril 2016 the Government is introducing the Personal Savings Allowance (PSA). This means that you can earn tax-free interest on money held in savings or current accounts, that's in addition to any balance you have in an ISA already. The PSA can be a little confusing so we've put together a useful guide that explains everything you need to know as simply as possible.

Firstly, the PSA is separate to your tax-free annual ISA allowance. This means that interest from Individual Savings Accounts (ISAs), doesn't count towards your Personal Savings Allowance because it's already tax-free.

From April 6 th2016, the PSA will determine the overall limit on the total amount of tax-free interest you can earn on all your deposits across all the different products and accounts you may hold. 

This means that:

  • most people will no longer pay tax on credit balance or savings interest up to £1,000*  
  • banks and building societies will stop deducting tax from your account interest
  • your interest will be paid gross although you may still need to pay tax on it, depending on your individual circumstances

You don't need to do anything to claim your Personal Savings Allowance; your bank will just stop deducting tax and pay your interest gross and if you already receive your interest gross you will continue to do so. Any interest over this amount will be taxed direct through the HRMC through your tax code. 

This table details how the Personal Savings Allowance impacts you based on your income, including any interest. Any interest earned through an ISA doesn't add to your tax banding, but your PSA does count towards your tax banding. 

Your yearly income / tax bandYour allowance
Less then £17,000 (including interest)All your interest           
If you pay tax at the basic rateEarn up to £1,000 interest tax-free
If you pay tax at the higher rateEarn up to £500 interest tax-free
Additional rate taxpayers No Personal Savings Allowance

How the numbers might work for you

So, after 6 April interest will be paid gross instead of net, although you may still need to pay tax on it, depending on your individual circumstances. If you are a basic rate taxpayer and in previous years you received an annual interest payment of £80, after 6 April 2016, this annual payment would go up to £100. This example assumes identical balances are saved over a full year, at the same rate of interest.

This is all good news for savings account holders but there are great, long term benefits to holding an ISA also so don't overlook ISAs just yet. 

*Source: HMRC PSA Factsheet - insert link HMRC PSA fact sheet

 

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