Q: I read your article last week about the PSA but what is it and how does it work?
Anna’s answer:
Thank you for getting in touch, this is a great question - it is always worth looking at the PSA in detail because it is such an important factor when considering the taxation of your savings and even when choosing a savings account.
The Personal Savings Allowance (PSA) was introduced in April 2016 and was a radical alteration of how savings interest is taxed and a change which has had a direct effect on the amount of interest that can be earned tax free for the majority of UK savers.
Following the introduction of the PSA, basic rate taxpayers pay no tax on the first £1,000 of interest earned on their savings.
Higher rate taxpayers have a lower PSA limit of £500, with no tax paid on interest up to this level. Unfortunately, additional rate taxpayers are not entitled to a PSA and so will pay tax on all interest earned in taxable savings accounts.
The upshot of this is that the majority of savers now have no tax to pay on their savings interest.
There are some other important points to bear in mind – an increase in income that takes you beyond the higher or additional rate tax threshold will reduce the PSA applicable to you and so may result in an increase in the tax you will pay.
It is also important to note that the PSA reduces as soon as you hit the tax threshold, so for example, even if your income only goes £1 into the higher rate tax threshold, the PSA will drop by £500.
If the PSA applicable to you reduces or you’re likely to breach the PSA limit, it is worth noting that interest earned on cash ISAs do not count against the PSA, so will remain tax free regardless.
This means that cash ISAs still have an important role for savers that are looking to reduce the amount of tax they pay on their savings overall.
In terms of admin, there is little for you to do – banks and building societies stopped automatically deducting 20% tax from interest earned and so all interest is now paid gross. This means that if your total interest (excluding cash ISAs) is less than the PSA applicable to you, there is nothing more you need to do.
If you receive interest in excess of the applicable PSA limit, then the onus is on you to pay the tax that is owed. The tax will be collected automatically through the PAYE system or through a self-assessment, if you already complete one.
If rates increase, as they have been doing so over the last couple of years, the amount that you can save before you go over the PSA limit will reduce. This means that cash ISAs can play an important part in savings planning going forward, as the interest will be tax free, regardless of the amount held.
However, for those looking to save smaller amounts, the PSA gives you a much wider selection to choose from, as you can look at both cash ISAs and standard savings accounts and select the highest rate and the most suitable account for your own circumstances.
The introduction of the PSA was great news for many savers, as it meant that a significant amount of your savings interest, if not all of it, is now tax free.
If you need any further help with finding the accounts that are most suitable for your needs, please call us on 0800 011 9705 to speak to one of our expert savings specialists.
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