Tax boost for savers on its way
Written on 22nd February 2016
A radical overhaul of the way savings are taxed is happening in April.
The change means that basic-rate taxpayers will be able to earn up to £1,000 in savings income a year tax free while for higher-rate taxpayers the limit will be £500. Known as the Personal Savings Allowance (PSA), it won’t be available for additional-rate taxpayers.
Anyone who has total taxable income (the income on which you pay income tax) of less than £17,000 a year won’t pay tax on any savings income they have and will no longer have to complete an R85 form to apply to have their savings paid without tax taken off.
Around 18 million savers will benefit to the tune of £25 a year on average, according to the government. But it estimates that 1.4 million people - mostly additional rate taxpayers and those with higher than average savings - are likely to have to still pay some tax on their savings income.
Savings interest paid tax free
You don’t need to do anything to claim your PSA. Savings providers will pay savings interest without any tax deducted from 6 April. Currently they automatically deduct 20% unless the account is a tax-free account.
Savings in cash ISAs will continue to be tax free and won’t count towards your Personal Savings Allowance. So you could get interest from your cash ISA and still have a PSA of £1,000 if you’re a basic-rate taxpayer to use for your other non-ISA savings.
Going over your PSA
With interest rates so low at the moment, most people are unlikely to go over the PSA. For example, a basic-rate taxpayer earning 2% interest would need around £50,000 of non-ISA savings before they’d have to pay interest on their savings. But remember that if interest rates go up then you’d reach the PSA with a lower amount of savings.
If you do go over your PSA, you’ll have to pay tax on your savings as usual either at 20% (basic-rate taxpayers) or 40% (higher-rate taxpayers).
HMRC says it will usually collect this by an adjustment to your tax code. In theory this should make things easy because you won’t have to work out when you’ve gone over the PSA. But it’ll be interesting to see how easy it is for people to check that their new tax code is correct. If you already complete a tax return each year HMRC says you should continue to do this as normal.
For more information on how savings are taxed at the moment, see our guide on how savings are taxed.