Get ahead of the game - Increase your interest by 25%
One of the biggest changes for savers announced in the last Budget was the introduction of the Personal Savings Allowance (PSA). Although strictly speaking, the PSA is only available from April next year, in this article, we explain not just how it will work, but how you can make use of it straight away.
To recap, this new allowance - which is set to apply from the new tax year starting on 6th April 2016 – will mean that basic rate tax payers can earn up to £1,000 of savings interest, tax free. This is in addition to the tax free interest you earn on any money that is sheltered in cash ISAs. For higher rate tax payers the allowance is £500, but additional rate tax payers will not benefit.
According to the Government, this means that about 95 percent of savers will no longer pay tax on their savings – so, to reflect this, savings providers will then pay all interest in full, without deducting basic rate tax automatically, as they have to at the moment. This is great news for non-taxpayers and those who don’t expect to fully use their PSA, but it does mean that if you earn more interest than the allowance, you will be responsible for paying any tax you owe personally.
The even better news is that although this allowance will not be implemented until April 2016, you may be able to take advantage immediately, if you choose the account you invest in carefully. This is because the tax treatment depends on when the interest on the account is paid into your account.
There is no consistency between savings providers and different accounts pay interest at different times – some pay on a fixed date each year, for example 31st March, whereas others pay on the anniversary of when the account was opened or funded.
But, according to HMRC, savers opening an account now that does not pay interest until after 6th April 2016, will be able to benefit from the new allowance on any interest accrued from outset and of course the interest will be paid gross, so there will be no need to make any reclaim of tax.
If, on the other hand, you invest in an account where the interest is paid in the current tax year, the new PSA will not apply.
A spokesman from HMRC explained “If a savings product, such as a one year bond, taken out now pays out interest before April 2016, the saver will not be able to benefit from the new personal savings allowance as they have a right to access interest before April 2016 but if they can't touch the interest before April 2016, the saver can take advantage of the new allowance.”
For a basic rate taxpayer, the effect of using the PSA is to increase the interest covered by the PSA by 25%. For a higher rate taxpayer, albeit on a lower level of PSA, the effect is an uplift of more than 60%.
It’s worth noting that the Personal Savings Allowance is not currently in legislation, although it is expected to be introduced in a future Finance Bill. We’ll keep you posted.
We can help you identify competitive accounts which will pay interest after the PSA is introduced. If you would like to discuss this, or if you have any other immediate questions about how to squeeze the most from your savings, please call one of our advisers on 0800 321 3581.