Q. With the introduction of the new personal savings allowance in April this year, would the £1,000 tax free interest allowance include any interest earned from an existing cash ISA?
We have received numerous questions recently about the new Personal Savings Allowance that comes into effect later in the year, with a number of you wondering about how cash ISAs fit in.
From the 6 April 2016, the new Personal Savings Allowance will be introduced, which will be a radical change to how savings interest is taxed in the UK. Basic rate taxpayers will not have to pay tax on the first £1,000 of interest earned on savings (or £500 for higher rate taxpayers) so a welcome change for many. According to the government, 95% of people won’t pay any tax on their savings.
A key point to note in relation to the question above is that interest earned on cash ISAs will not count towards your Personal Savings Allowance..
Therefore, savers will be able to continue to add to their cash ISA pot, utilising some or all of their cash ISA allowance, safe in the knowledge that they can still take advantage of the Personal Savings Allowance with other savings accounts. After all, the more tax-free savings you can take advantage of, the better.
Cash ISAs will remain an important part of cash savings planning as all the interest will remain tax free regardless of how much this grows to, whereas the amount you can save tax free through the Personal Savings Allowance will be determined by the interest rates offered. When interest rates eventually rise, the amount needed to breach the Personal Savings Allowance will reduce, unlike the amount of tax free savings you hold in cash ISAs.
For more information about the Personal Savings Allowance, please take a look at our Factsheet and if you need any further assistance, please do not hesitate to get in touch.