To Tithe or Not to Tithe?
From today 6 April 2016, savings accounts started paying interest tax-free, and 95% of UK adults no longer pay tax on any saving - it's the biggest savings shake-up for a generation.
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 almost £75,000 in the top easy-access savings account. Here's the lowdown...
How much is the personal savings allowance?
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.
Is it just interest on savings accounts that counts?
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.
If I'm already saving into a tax-free account, is that interest covered by this allowance?
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.
Can my savings within the personal savings allowance push me into a higher income tax band?
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 £43,000 in 2016/17) 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).
The higher rate of tax starts on income above £43,000 (in the 2016/17 tax year). You earn £42,999 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.
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