May 3rd 2016

Mike Ellis takes a look at the new Personal Savings Allowance which offers savers up to £1,000 in savings income tax free.
Mike Ellis, JRW IFA
This is undoubtedly the biggest shake up to have happened to savings in the UK in a generation. From the 6th April 2016, basic rate taxpayers will be able to earn up to £1,000 in savings income tax free and higher rate taxpayers will be able to earn up to £500, additional rate taxpayers will not however be entitled to any Personal Savings Allowance (PSA).

This change means that 95% of adults in the UK will no longer pay tax on savings interest and banks and building societies will stop deducting tax from your account interest. And if you already receive interest without tax being taken off, you’ll no longer need to tell your bank or building society that you qualify for tax free interest.

We thought it would be useful if we answered some of the key questions relating to the new allowance and how this might affect you.

What qualifies as savings income?
Savings income includes account interest from bank and building society accounts and accounts with providers such as credit unions or NS&I.
It also includes interest distributions (but not dividend distributions) from authorised unit trusts, open ended investment companies and investment trusts income from government or company bonds and most types of purchased life annuity payments.

How much is the Personal Savings Allowance?
Your PSA depends on what rate of tax you currently pay:
•    Basic rate (20%) taxpayers will be able to earn £1,000 interest with no tax
•    Higher rate (40%) taxpayers – will be able to earn £500 interest with no tax
•    Additional rate (45%) taxpayers – they do not get an allowance.

Does income from an Individual Savings Account (ISA) count towards your Personal Savings Allowance?
No, income from ISA’s do not count towards your Personal Savings Allowance because they are already tax free.

Will the changes affect savings income received before the 6th April 2016?
No, changes will only apply to savings income paid after 6th April 2016.

Do you need to tell your bank or building society about other savings income or your tax rate?
No, you do not need to supply any information about your tax rate or other savings income.

How do you claim back tax paid on other savings income?
From 6th April 2016, banks and building societies will pay credit interest with no tax taken off. However, you may still receive other types of savings income with tax taken off eg interest distributions but not dividend distributions, from authorised unit trusts, open ended investment companies and investment trusts.

Is there any point in saving in an ISA?
ISA’s are still very worthwhile because importantly cash ISA interest doesn’t count towards your PSA, meaning you can earn it tax free and still have your full PSA allowance. Therefore if you are a top rate taxpayer or bigger saver who has used up their PSA, there are clear tax advantages of savings in a cash ISA.

Will the Personal Savings Allowance affect the new Dividend Allowance?
No, they are two separate allowances.

What will this mean for accounts relating to a business/charity/club or an association?
Only individuals get a Personal Savings Allowance. If your accounts relate to a business, charity, club or association, they will automatically receive interest without tax taken off from 6th April 2016.

Is this the same as your personal allowance?
The new personal savings allowance has created a new tax bracket in its own right within the income tax system. Your personal savings allowance is completely separate from the personal allowance all taxpayers get on their standard income, where most people can earn £11,000 before any tax is charged.  However, if you do owe tax on savings interest, your personal allowance will be lowered from £11,000 so you pay the right amount of tax.

What if you exceed the limit?
One of the major questions since the PSA was announced has been how tax will be collected for those exceeding the limit. The PSA amount will be added to the £11,000 personal allowance which everyone gets. The untaxed interest that you earn in the year will then be deducted, generating a total tax free figure. Effectively, this means the amount by which your savings income exceeds the PSA will simply be deducted from the personal allowance to collect the tax. Those with no qualifying savings or who are under their PSA limit, will not receive any extra personal allowance as a result of this calculation. This will still remain at £11,000.

You are a basic rate taxpayer and your partner is a higher rate taxpayer. What PSA would apply to your joint account?
In this situation, the interest earned is split down the middle. You will get £1,000 of personal savings allowance and your partner will get £500. So, if interest earned on the joint account is £1,000, your remaining personal allowance will be £500 and your partner’s will be used up.

Is interest paid into a tax free account covered by this allowance?
No, interest that is already tax free isn’t included – this includes ISA interest and Premium Bond prizes. Interest from these will still be paid tax free but just won’t count toward your PSA limit.

Can savings within your Personal Savings Allowance push you into a higher income tax band?
The simple answer is yes it could. For example, if your non savings income which would generally be income earned from work (both employed and self-employed), is below the higher rate tax threshold but your savings income could take you above it. This poses the question of whether you get the £1,000 for basic rate taxpayers or £500 for higher rate taxpayers?

We hope that these questions and answers help to explain the new Personal Savings Allowance for you. Broadly speaking this is really good news for savers but there are things to look out for and be aware of. If you would like to discuss the PSA and how it will affect you, please don’t hesitate to get in touch with us here in the JRW IFA team.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.