New Personal Savings Allowance should be tapered to create a fairer system, but most savers will still be better off.

29th January 2016

Savers looking to improve the returns on their savings will need to take more into account than the best rate of interest they can get, from next April.

The introduction of the Personal Savings Allowance from 6th April 2016 means that basic rate taxpayers will be eligible for a £1,000 tax-free savings allowance, dropping to £500 for higher rate taxpayers and it is removed altogether for additional rate taxpayers who are earning more than £150,000 a year.

However, because the allowance is removed in a ‘precipice’ fashion for those breaching the higher rate and additional rate tax band, it creates a scenario where someone just tipping into the higher tax bracket by virtue of additional savings interest could lose out.

First of all, it has to be said that this allowance is most definitely a benefit for savers in general. The ability to earn additional interest with no tax to pay is always a good thing and no-one will be worse off under the new rules than they are today.

However, that is not to say the new rules will be fair to all of those who are trying to increase the amount of interest they are getting on their savings. The way the Personal Savings Allowance is structured means there will be specific scenarios where someone who is trying to improve their situation by earning more interest could actually lose out because of the way the allowance could reduce, depending on which tax bracket they are in.

For example, Colin has earned income - after deducting his personal allowance (£11,000 for the 2016/17 tax year) - which is £1,000 below the higher rate threshold, plus he has savings interest of £1,000.

Under the new system, he will not pay any tax on his interest as he has not breached the higher rate threshold. But if he moves his savings to increase the rate he receives and gets just an additional £10 in savings interest, as this makes him a higher rate taxpayer, his Personal Savings Allowance will drop to just £500.

It’s even worse for someone who slips into the additional rate tax bracket, as they will lose the allowance completely.

It is not a fair system and it does not need to be this way. If the Government simply implemented a taper system to reduce the amount of allowance someone has, based on the additional income they are receiving in interest, as opposed to this ‘precipice’ system, it would be a lot fairer to all.

But it is important that savers are not put off trying to improve the amount of savings interest they can receive, because while these extreme examples show that some people may be worse off if they just breach the tax band thresholds, there will be far more people who will benefit handsomely by increasing the interest they earn, regardless of the Personal Savings Allowance they will receive.
Please note that Savings Champion are not tax specialists and therefore this is for information only. If you think your income could breach either the higher rate or additional rate tax threshold, you should seek advice from a tax specialist, as increasing the interest you earn on your savings could affect your Personal Savings Allowance and therefore the amount of interest that you are entitled to earn tax free.

For our Free Factsheet on the Personal Savings Allowance, click here.
If you think your income could breach either the higher rate or additional rate tax threshold, you should seek advice from a tax specialist, but our briefing document might help in the first instance. Email us to request a copy.

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