Personal Savings Allowance
From 6th April 2016 most people are no longer required to pay tax on their savings.
With the introduction of the Personal Savings Allowance (PSA) by HM Revenue and Customs (HMRC) basic rate taxpayers who pay 20% tax can now earn up to £1,000 in savings income tax free and higher rate taxpayers who pay 40% tax now have a tax free allowance of £500. Tax payers who pay a rate of 45% are not eligible to receive an allowance.
|Income Tax Band||Personal Savings Allowance|
|Basic rate 20%||Up to £1,000 in savings income is tax-free|
|Higher rate 40%||Up to £500 in savings income is tax-free|
|Additional rate 45%||No Personal Savings Allowance|
How to claim your PSA
No action is required by you. The introduction of this scheme means that banks and building societies will no longer be deducting tax from your savings interest and all interest is to be paid gross from now on. This will need to be declared by you if you are eligible to complete an HMRC tax return.
What type of savings income is covered by the PSA?
Savings income includes interest from:
- bank and building society accounts
- accounts with providers like credit unions or National Savings and Investments
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
Exceeding your personal allowance
If you exceed your personal allowance you will be required to pay tax on the interest that you earn. HMRC will collect payment by adjusting your tax code through self-assessment where applicable.
Tax on your investment bond
With the introduction of the PSA, interest is paid gross on your fixed-rate bond. If you have an existing fixed-term bond then the interest earned will contribute towards your PSA once the bond matures.