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Be savvy when it comes to your Personal Savings Allowance

What is the Personal Savings Allowance (PSA)?

As of 6 April 2016, the Personal Savings Allowance (PSA) has meant that basic-rate taxpayers and higher-rate taxpayers can earn £1,000 and £500, respectively, in tax-free savings interest. Additional rate taxpayers do not get an allowance.

These rules, according to HMRC, take roughly 95% of savers out of paying any tax on their savings.

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.

Note that if your total taxable income, including savings income, is less than £17,500, you won’t pay tax on any savings income.

What counts as savings income?

The following interest counts as savings income:

  • Any interest from bank and building society accounts;
  • interest from accounts provided by credit unions or National Savings & Investment (NS&I);
  • interest distributions from authorised unit and investment trusts and open-ended investment companies;
  • income from government or company bonds;
  • most types of purchased life annuity payments;
  • peer-to-peer lending interest and,
  • interest earned on other currencies held in UK-based accounts

It is worth bearing in mind that interest earned on ISA accounts, tax-free NS&I products and premium bond winnings do not count towards your PSA.

What tax will I pay if I exceed the threshold?

Basic-rate taxpayer: A basic-rate taxpayer’s PSA is £1,000. Anything you earn in savings income, above £1,000, will be taxed at 20%. For example, if you earn £1,250 in savings income, you will pay 20% tax on the £250 excess.

This means £50 will be deducted from your savings income.

Higher-rate taxpayer: A higher-rate taxpayer’s PSA is £500. Anything you earn in savings income, above £500, will be taxed at 40%. For example, if you earn £1,800 in savings income, you will pay 40% tax on the £1,300 excess.

This means £520 will be deducted from your savings income.

What do I need to do?

HMRC has recently updated its guidance in respect of what you need to do to claim your PSA.

If you currently fill out a self-assessment tax return, you should continue to do this as normal.

If you’re a sole bank account holder, not within the self-assessment system, HMRC will normally collect tax via your tax code. Your bank or building societies provide HMRC with the information they require to do this.

Essentially, your personal allowance for income tax will be reduced to accommodate any tax due on savings interest.

However, if you are a joint bank account holder and not within the self-assessment system, you must contact HMRC and report the interest that you have earned on savings.

Applying the PSA to joint accounts

If you are a basic-rate taxpayer and the person you hold a joint bank account with is a higher-rate taxpayer you should be aware of how the PSA applies in this instance.

The basic-rate taxpayer will be entitled to £1,000 tax-free savings interest as before. The higher-rate taxpayer will also be entitled to the same allowance, as before, of £500.

The interest earned on the joint account is assumed to be split equally between the account holders. So, if £1,000 in interest were to be earned, the basic-rate taxpayer would have £500 of their allowance remaining. The higher-rate taxpayer, however, would be left with no remaining allowance.

The higher-rate taxpayer will pay tax at 40% on any savings income received in addition interest on the joint account. The basic-rate taxpayer could, however, earn interest on other accounts up to £500 before any tax would be due.

At George Hay we understand the challenges individuals face when it comes to personal taxation. For a start, the range of personal tax rates and allowances is huge and effective planning is essential.

Whether you’re employed or self-employed, our team of expert tax advisers can help. We can assist with everything from fulfilling your self-assessment obligations and dealing with HMRC, to maximising your tax savings and supporting you in the event of an enquiry.

To find out more about our taxation services, click here, or contact us today.

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