Personal Savings Allowance

Personal Savings Allowance

The Personal Savings Allowance was introduced in April 2016. It offers the chance for savers to grow their money tax-free by earning interest up to £1,000 for basic rate taxpayers, or up to £500 for higher rate taxpayers.

All interest from savings will be paid gross, which means tax will no longer be deducted by your bank or building society.

How does the Personal Savings Allowance work?

HMRC has supplied a few helpful examples to illustrate how the allowance works in practice for basic and higher-rate taxpayers:

You earn £20,000 a year and get £250 in account interest – you won’t pay any tax because it’s less than your £1,000 allowance.

You earn £20,000 a year and get £1,500 in account interest – you won’t pay tax on your interest up to £1,000. But you’ll need to pay basic rate tax (20%) on the £500 above this.

You earn £60,000 a year and get £250 in account interest – you won’t pay any tax because it’s less than your £500 allowance.

You earn £60,000 a year and get £1,100 in account interest – you won’t pay tax on your interest up to £500. But you’ll need to pay a higher rate tax (40%) on the £600 above this.

Is all savings income covered by the Personal Savings Allowance?

Interest earned on non-Isa savings and current accounts is included in the personal savings allowance. There are some exceptions, such as Individual Savings Accounts (ISAs) and some NS&I savings options, such as premium bonds. Since they are not tax-free, they are not protected by the personal savings allowance. Some investments are also covered by the personal savings allowance.

Profit from government or corporate bonds, peer-to-peer lending interest, and interest dividends, such as income from bond funds, approved unit trusts, open-ended investment firms, and investment trusts, can all be used against your personal savings allowance. In a nutshell, the underlying assets determine whether the investment gain is taxed as savings or as a dividend.

Can interest from savings push me into a higher tax bracket?

Yes, savings income under the allowance also counts against the basic or higher-rate cap, affecting the amount you’re entitled to and the tax rate you’ll pay for any extra earnings. If you are a basic-rate taxpayer who earns enough interest from savings to drive you over the higher-rate tax threshold, you are only entitled to a £500 deduction and must pay 40% tax on the remainder.

In Scotland, the higher-rate threshold works slightly differently. You pay 41% income tax on income above £43,662 in 2021-22, up from £43,430 in 2020-21.

What happens if I exceed my personal savings allowance?

In most cases, any taxes owed will be paid automatically via the pay-as-you-earn (PAYE) scheme, which will rely on the information given by banks and building societies. If this is the case, you should receive a ‘notice of coding.’ Alternatively, if you normally file a self-assessment tax return, it may be reported as usual. Interest may be eliminated as part of long-term efforts to overhaul the existing tax system, interest could eventually be processed directly from individual digital tax accounts. 

What if I've paid too much tax on my interest?

If your bank or building society did not use your entire personal savings allowance, you will recover the tax you paid on your savings interest. To assert the tax you were wrongfully paid, fill out form R40. Savings from up to four tax years ago can be said. It usually takes six weeks to get your money back.

What is the 'savings starter rate'?

In addition to the personal savings allowance, an additional tax break already lets low-income people save tax- If your bank or building society did not use your entire personal savings allowance, you will recover the tax you paid on your savings interest. To assert the tax you were wrongfully paid, fill out form R40. Savings from up to four tax years ago can be said. It usually takes six weeks to get your money back.

Free or at a reduced rate. This £5,000 ‘starting rate for savings’ means that if your net taxable income is less than your personal income tax exemption plus £5,000, you will not pay any tax on your savings.

This means you won’t pay any tax on your investments if your gross taxable income in 2021-22 is less than £17,570. It’s easier to think of these payments as being stacked on top of one another: first, the tax allowance (£12,570 for 2021-22), then the £5,000 starting savings rate at 0%, and eventually, the personal savings allowance of up to £1,000. When HMRC calculates the tax you owe, they’ll first look at your income from other sources, and then from your savings income.

Does this mean ISA's are pointless?

Even though there are now generous tax cuts on savings and interest on non-ISA savings accounts is generally higher, there are still considerable long-term benefits to ISA’s, particularly if you earn a lot of money or have a lot of money saved. Combining a variety of savings options and ISA’s, as well as high-interest current accounts, is likely to be the best way to maximize returns and minimize tax.

Published on: 05/05/21

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