PERSONAL SAVINGS ALLOWANCE
Each and every one of us will enjoy a new tax-free Personal Savings Allowance (PSA) as of 6th April 2016, which will cover any savings income paid to individuals.
Basic rate taxpayers will be able to receive up to £1,000 of savings income tax-free, whilst higher rate taxpayers will see their allowance halved to £500. The PSA will not however be available to any saver liable to the 45% additional tax rate.
So what exactly is ‘savings income’?
Savings income includes interest paid by savings accounts held with banks, building societies, NS&I and credit unions, as well as interest distributions from authorised unit trusts and open-ended investment companies (OEICs). Also beneath the umbrella is ‘interest equivalent’ income. This includes the profits earned on government or company bonds which are issued at a discount or repayable at a premium, and even the income paid from certain alternative finance arrangements. Other types of savings income include purchased life annuity payments and gains from certain contracts for life insurance.
Savings income paid to an individual is usually chargeable at the basic (20%), higher (40%) or additional rate (45%) of income tax unless:
- The 0% starting rate of tax applies to some or all of the savings income (ie. those with earned or pension income below £15,600 in 2015/16 or £16,000 in 2016/17).
- The savings income arises within an ISA.
Alongside the introduction of the Personal Savings Allowance, deposit-takers, building societies and NS&I will now pay interest gross. This change therefore means that many higher rate tax payers with less than £50,000 in cash deposits will no longer have to pay tax on same.