You're about to get more interest on your savings

What the tax change means for you - and how to take advantage


picture of lovely girl with big piggy bank

Good news! There's a new rule that means most will pay no tax on any interest they earn. The bad news is nine in ten people haven't even heard of it. Here's what you need to know.

One of the various new rules that begin at the start of the next financial year on 6 April is the introduction of Personal Savings Allowance (PSA). The idea is basic tax rate payers (i.e. those who earn under £43,000 a year) can earn £1,000 in interest tax-free. That's on top of any interest made from money in a tax-free ISA.

At the moment, 20% tax is automatically deducted from all current and savings accounts other than ISAs. This will stop, and many savers will get to keep the full amount. So someone who earns £5 a month in interest will keep £5, rather than £4.

Unfortunately, not many people are clear on how it will work. Research by AA Financial Services found 90% weren't aware of the PSA, even though there's less than a month until it's launched.

Once it was explained to them, almost half didn't know what to do with their money, confused by the choice between ISAs and savings accounts.

Two things to consider once the PSA is introduced

1. How much you earn

If you earn more than £43,000, your PSA drops to £500 a year. That is probably still enough for the bulk of savers, but it's worth considering your options. Any interest earned over that amount will be taxed at 40%.

2. The interest rate on your savings

You'd need £50,000 in a 2% account to earn the £1,000 interest in a year. But if interest rates were to rise to 3%, there would be an extra £500 subject to tax.

Where should you put your money?

Some of the best interest rates right now are in current accounts. You can earn up to 5% in interest, though there are often limits on how much money is eligible for these rates.

This article is provided by the Money Advice Service.

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