The Personal Savings Allowance (PSA) comes into force from the start of the 2016/17 tax year and will reduce the amount of tax paid on savings interest for the majority of us.
It is a radical new government scheme designed to encourage people to save more, it is conscious that it needs to incentivise savers at a time when interest rates are historically very low.
Up until the introduction of the PSA all bank and building society interest was paid net – i.e. after 20% has been deducted at source by your account provider (apart from ISAs).
The tax treatment of savings interest changes from 6th April 2016 when everybody will receive their interest payments gross – i.e. without any tax deductions.
The PSA applies to interest earned on all non-ISA cash savings ,current accounts and Peer to Peer lending and will allow savers to receive a generous portion of their interest totally free of tax.
As a result of this move it’s expected that around 95 per cent of savers will receive their interest tax free – a change that gives the vast majority of savers an instant boost of 20% on their savings income.
The amount of tax free interest you will be entitled to under PSA will be based on your annual taxable income as follows:
- If you earn less than £43,000, i.e. a basic rate taxpayer, there will be no tax payable on the first £1,000 of savings interest earned each year.
- The tax free allowance if you are the higher rate tax bracket (earning between £43,001 and £150,000) has been set at reduced limit of £500.
- People in the 45% tax band, i.e. those with an income above £150,001 are currently not entitled to the PSA.
It’s a positive move that will see lower earners benefit from the largest allowance giving a welcome but long overdue instant boost to UK savers.
The amount you can keep in your savings account and remain within the £1,000 tax free limit will depend on the size of your balance and the rate of interest your bank or building society is paying on your account(s).
The table below gives you an idea of how much you’ll be able to maintain and remain within your annual Personal Savings Allowance.
| Interest rate on your savings | Max tax free balance for a basic rate taxpayer (interest £1000 tax free pa) | Max tax free balance for a high rate taxpayer (interest £500 tax free pa) |
| 1.50% | £66,660 | £33,330 |
| 2.50% | £40,000 | £20,000 |
| 3.50% | £28,570 | £14,285 |
| 5.00% | £20,000 | £10,000 |
| 7.00% | £14,285 | £7143 |
The figures above assume a savings account in a sole name; however for joint accounts the allowance and thus the balances you can keep are doubled.
Savers with bigger savings pots who are concerned that they will generate more than their annual maximum tax free interest allowance, can still shelter a further £15,240 per person in a tax free ISA during the 2016/17 tax year.
