Personal Savings Allowance (PSA)

29 April 2016

From April 2016, everyone will get a personal allowance for interest earned on savings.The tax free allowance for basic tax rate payers is set at £1000, higher rate tax payers will only receive £500 and additional rate tax payers will not receive an allowance.Personal-Savings-Allowance-PSA-Table.JPG

Savings earning beyond the allowance is taxed at 20% for the basic rate tax payers and at 40% for the higher rate tax payers.

The introduction of personal savings allowance has caused confusions with some tax payers as it’s mistaken for the £5,000 starting savings rate where the tax rate is 0%.

There has also been confusion as to when should a taxpayer declare the savings income for tax. Interest on most fixed term savings account or bonds are paid annually but not withdrawn until the end of the fixed term or maturity of the bond.

HMRC’s deciding factor is when the interest is earned or available to the tax payer. In other words if the tax payer cannot access the interest earned then it does not count towards the PSA for that year and the taxpayer would potentially lose that allowance and be taxed at the end of the fixed term or maturity of the bonds on the whole amount earned should that amount be over the personal savings allowance.

In effect individuals could earn up to £17,000 without paying any tax if it is earned in the order of £11,000 from employment or self-employment income and up to £6,000 of income in savings where they utilise their £1,000 free allowance and the remaining is taxed at 0%.

However any employment related earnings over the personal income allowance limit of £11,000 would reduce from the £5,000 starting savings rate. If an individual for example earns £13,000 then they are £2,000 above the standard personal income allowance which means their savings allowance would reduce by the same amount (the starting saving allowance plus the personal savings allowance), giving them up to £4,000 of tax free earning from their savings.

If you require further information on how the new PSA can affect your tax position please contact us or get in touch today by calling 0203 039 3993.

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