The financial year started on 6th April and with it a new tax year and new savings regulations. Stop yawning! There is actually a lot to celebrate for the nation's savers. In particular, any interest earned on savings will be tax-free, up to the saver's annual personal savings allowance (PSA).
How much is the PSA?
If you're a basic rate taxpayer i.e. you earn less than £43,000 pounds a year – you can earn £1,000 in savings interest each year without seeing tax deducted.
Previously, you would have paid 20% in tax. Only non-taxpayers were able to receive interest 'gross' (with no tax deducted), and only then after filling in a form.
If you're a higher-rate taxpayer earning more than £43,000 a year, you can earn £500 in savings interest tax-free.
The news isn't so cheery for those on the additional rate of tax, which is levied at 45% on earnings above £150,000 per annum – they have no PSA and must account for any tax they owe through their annual tax return.
How do I get tax-free interest?
The good news is, the PSA works automatically. You will continue to earn your interest without deduction of tax – often referred to as 'gross' – until you breach the £1,000 or £500 limit.
For up to 95% of the population, this isn't going to be an issue. As a basic rate tax payer earning about 1.5% on a typical savings account, you'd need to have a balance of well over £60,000 before you earned £1,000 in interest.
Higher rate taxpayers would need well over £30,000 of savings earning this rate before they approached the £500 interest level.
What kind of accounts are included?
The PSA applies to all savings interest, whether it's from a savings account, a fixed-term savings bond, your current account or credit union account, or from peer-to-peer lending.
If you have a mix of accounts, the interest you earn from all of them will be added to a single pot to calculate the total you're getting each year.
If you already have savings that are yielding tax-free interest, such as an individual savings account or Premium Bond winnings, note that the interest you earn here won't count against your PSA allowance.
So regardless of what you get from your ISAs or Premium Bonds, you'll still have £1,000 of £500 of PSA to apply to other accounts.
I haven't been paying tax on my savings interest – how am I affected?
Anyone with total taxable income from earnings and savings of less than £16,000 a year shouldn't pay tax on any of their income.
This figure is made up of the income tax personal allowance of £11,000 that everyone receives, plus a £5,000 starting rate limit for savings income.
In effect, nothing has changed for you now the personal savings allowance has been introduced.
But you'll no longer need to tell your bank or building society that you're a non-taxpayer.
So are ISAs still worthwhile?
Yes. The PSA is very much the creation of the present government, and there is no guarantee it will survive in the long term. ISAs, however, have grown much deeper roots in the nation's financial landscape.
And while you need substantial savings to use your PSA, remember that, if and when interest rates start to rise, the amount you'll need on deposit to breach the threshold of £1,000 or £500 will reduce.
And the tax-free interest you earn on your ISA or Premium Bond can simply be seen as the tax-free icing on the cake of your PSA.
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