You may have received a letter from HMRC recently asking you to fill in a tax return. This is due to a recent rules change, and the introduction of the ‘personal savings allowance’ (PSA). Before 2016, any interest on your savings would be taxed at 20% automatically. So for every £100 of interest you earned, you’d receive £80. Now, everyone receives interest without any deductions – but if they earn more than their allotted PSA, this interest is subject to tax.
- Basic rate (20%) tax payers not need to pay tax on the first £1,000 of interest they earn.
- Higher rate (40%) tax payers will not need to pay tax on the first £500.
- Additional rate (45%) tax payers are not eligible for a PSA and will need to pay tax on all the interest they receive.
HMRC believes that this will mean that around 95% of taxpayers will now have no tax to pay on their savings income.
What counts towards my personal savings allowance?
Interest from bank accounts, savings accounts, building societies, credit union accounts, corporate bonds, government bonds and gilts will be considered to count towards your PSA. Any interest you earn above your PSA will be taxed at your marginal rate.
Let’s imagine you’ve earned £1,500 from various savings accounts, depending on your tax rate, here’s what you’d have to pay:
| Personal savings allowance | Taxable amount of £1,500 | Tax to pay | |
|---|---|---|---|
| Basic rate (20%) | £1,000 | £500 | £100 |
| Higher rate | £500 | £1,000 | £400 |
| Additional rate (45%) | £0 | £1,500 | £675 |
Your personal savings allowance will not count towards any dividends you receive from shares (which are covered by the new dividend allowance). Interest from tax-free accounts like ISAs (individual savings account) are not taxed and so will not count towards your PSA, but there are limits to how much you can save into ISAs each year.
How will I know if I need to pay any further tax?
HMRC has been getting in contact with those who need to pay tax on interest above their personal savings allowance. They may have asked you to submit your own tax return for this income.
If this is the case your and aren’t sure what to do next, or you want to look at other options for your savings you can talk to a Wren Sterling adviser at your building society.
https://www.gov.uk/apply-tax-free-interest-on-savings
https://www.moneysavingexpert.com/savings/personal-savings-allowance/
Taxation rates current for tax year 2019/20 and may be subject to future change.
Related posts:
Bear with me, don’t panic, keep at it
Wren Sterling Group's new CIO Rory McPherson reflects on what is happening in the markets and sees r...
A crazy few days and what happens next?
Following our initial response to the Mini Budget, Kwasi Kwarteng rows back on his plan. How will th...
What’s going on with ‘defensive’ investments
With inflation at a 40-year high, this is bad news for bond investors as the level of return they ge...
No such thing as a “no risk” pension
When looking at options for funding your retirement, it’s important to understand that your pension...
Is the UK property market reaching the end of the boom period?
UK house prices increased by an average of 12.4% in 2022, sustaining a trend of rising prices that h...
Higher house prices upset estate planning in 2022
With UK average house prices increasing, investors are closely monitoring this rise. Homeowners may...
