The tax-free Personal Saving Allowance (PSA) was introduced this tax year, which means that you to earn a certain amount of interest on your savings before you need to start paying tax. It is estimated that this will allow around 95% of savers to not pay any tax on their savings!
The Personal Savings Allowance (PSA) resembles your Personal Allowance in that the amount you are allowed to earn before being taxed depends on which tax bracket you fall into. After (or if) you earn the relevant amount of interest on your savings according to your tax band, the tax you pay on any further savings interest will be at the same rate as your Income tax. And like all other things tax-related, your Personal Savings Allowance will be renewed each tax year.
It is important to remember that the Personal Savings Allowance is not restricted to savings accounts - this means that it includes all interest from banks, savings, credit union or building society accounts, government or company bonds and gilts, as well as interest distributions from authorised trusts and investment organisations. It also includes interest that may have been earned in other currencies but held in a savings account in the UK. But it does not include interest earned from dividends on shares or funds.
Interest on joint accounts will be shared equally between account holders, even if you are on different income tax rates – for example, even if you are on the higher rate while your partner is on the basic rate, and your joint account has earned £500 interest, you will each have earned £250 interest. This will leave you with £750 Personal Saving Allowance remaining and your partner with £250.
A Personal Savings Allowance is separate from an Individual Savings Account (ISA) or Premium Bonds - the tax savings made with your ISA do not affect the tax-free allowance of your Personal Savings Allowance. This tax year’s (2016-2017) annual ISA allowance is £15,240 per person in any combination of cash ISA, investment ISA or innovative finance ISA. Interest from National Savings and Investments (NS&I) tax-free products are also already tax-free and so do not count towards your Personal Savings Allowance.
In the case that your taxable income (e.g. your salary) is just below the next tax band, and the interest that you earn on your savings bumps you up into the next tax band, then you’ll become a higher-rate taxpayer – so in a few cases, some people might be better off earning less interest, but this is a pretty rare event (Martin Lewis’ blog describes this scenario really well).
If you receive money back from PPI or compensation, the bank or building society will still need to deduct tax from any compensation interest paid to you – however you could still be able to get a tax rebate. To do this, you’ll need to fill in a R40 form (or R43 is you’re living abroad) and send it to HMRC
You don’t need to do anything to claim your Personal Savings allowance, as it will be handled automatically through your tax code – and if necessary, HMRC will change your tax code accordingly if your savings interest takes you about your Income Tax bracket. This means that you’ll get a reduced Personal Allowance for Income Tax to offset any tax you might owe on savings interest. If you do Self Assessment, you’ll continue to pay your tax through the tax return system.
HMRC have introduced the Personal Tax Account – an online system that you can log into and check your tax information. In April 2016, millions of individuals were able to access their digital accounts, and the entire integrated system will be completed by 2020.
To access your Personal Tax Account, you’ll need to register with GOV.UK Verify – and to do that, you’ll need to have your identity confirmed by a Government approved identity provider, like CitizenSafe.
CitizenSafe are 100% dedicated to identity verification, it’s all we do! Once you’ve had your identity checked with us, you’ll be able to access all available GOV.UK online services, any time, any place – no more waiting on hold music at the end of the phone line.
Tax is inevitable, but it doesn’t have to be difficult. We created the CitizenTax app to help make tax a little easier – you can use it to find out if you need a self-assessment, or use the Inheritance Tax or Net Salary calculators. CitizenTax is available through iTunes and GooglePlay.