6 April marks the start of the new tax year. And this next tax year brings with it some really great news with the introduction of the Personal Savings Allowance (PSA).
This means that the vast majority of Brits – reportedly 95% – will never have to pay tax in their savings interest again.
The new PSA allows basic rate taxpayers to earn up to £1,000 a year in savings interest before paying income tax on it.
This is great news, but it’s a lot to take in. So let’s explain…
Who is eligible?
When the PSA is released in April, a basic rate taxpayer will have to be earning over £1,000 in savings interest per year before they must start paying tax on it.
Higher rate taxpayers will have a reduced £500 limit.
Additional rate taxpayers will continue paying their rate of 45% tax.
What do I have to do to claim?
Absolutely nothing! That’s the beauty of it. As long as you’re in regular employment, you just sit back and start building a savings strategy that will allow you to make the most of the change. HMRC will do all the hard work.
If you complete a self-assessment tax return, you should carry on with this as normal.
How much money does this mean I can save without being affected?
There’s no hard and fast answer to this as savings rates differ and are constantly changing, but a few examples might make it easier to get to grips with.
You would have to have over £50,000 in a savings account with a 2% interest rate (unimaginably high in the current climate) to start paying tax on any interest earned as a basic rate taxpayer. Over £25,000 for a higher rate taxpayer.
The higher the rate, the less you’ll be able to save without paying tax on it, but with rates unlikely to see significant growth in the foreseeable future, this should give you a pretty good idea of what your limits are for now.
How much will it save me?
A basic rate taxpayer currently pays 20% on the interest earned. Meaning for every £100 interest earned, you pay £20 in tax. Higher rate taxpayers pay 40%.
So, under the new allowance, if you were saving the maximum of £1000 a year as a basic rate taxpayer or £500 as a higher rate payer, it would save you £200 a year.
What about my ISA allowance?
Your ISA allowance is separate to the Personal Savings Allowance and you can still take advantage of that on top of the new PSA. Particularly for higher rate tax payers, who get a lower allowance, and for additional tax payers who are unaffected by the change, ISAs will remain a key player in the savings game.
What’s the catch?
There isn’t one! The rules are changing and definitely for the benefit of the majority of Brits. Just make sure you’re taking advantage of it.
For more information, visit Gov.uk.
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