A radical shake-up of the rules governing savings accounts means that most people are now no longer paying tax on the interest they receive from banks and building societies.
More specifically, the introduction of the Personal Savings Allowance (PSA) at the start of this current tax year means that basic and higher rate taxpayers are able to earn a certain amount of savings income before tax has to be deducted.
Basic rate taxpayers have an allowance of £1,000, while higher rate taxpayers can earn up to £500 tax-free. People with a total taxable income of less that £17,000 don’t pay tax on any of their savings income. There is no PSA for additional rate taxpayers.
The government estimates that some 95% of the population will get to keep all of the interest from their savings income as a result of the changes.
Another key benefit is that income from ISAs does not count towards the PSA, which means even more opportunities to save tax-free.
Frequently Asked Questions
Given that the PSA is a brand new initiative and represents a different approach to how non-ISA savings accounts operate, it’s not surprising that many of our customers have been asking for more information. We put some of the most commonly asked questions to Sophie Dwyer, the West Brom’s Product Manager for Savings.
How do I know if I qualify for an allowance?
It is linked to your income tax rate. Basic and higher rate taxpayers qualify, who are taxed at 20% and 40% respectively. Additional rate taxpayers, those paying 45% tax, do not receive a PSA. Neither do those with a taxable income of less than £17,000, but this is because they are not taxed on any of their savings income.
What do I have to do in order to claim it?
No action is required to claim a PSA. Under the old rules, banks and building societies deducted tax from the interest on customers’ savings at source, but for eligible savers this has now ceased. Instead you will receive the gross rate of interest on your account(s).
Where does the savings income within my PSA come from?
Pretty much any kind of interest-bearing account that isn’t an ISA – a savings account from your bank or building society, a fixed rate bond, a current account that pays interest, a credit union account or a product from National Savings and Investments to name just a few.
What happens if my savings income exceeds my PSA limit?
You will have to pay tax on the additional income. This will normally be collected automatically by HM Revenue & Customs through a change to your tax code, so you won’t have to do anything yourself (unless you self-assess in which case you should continue to pay through that system).
If my savings are now tax-free, is there any point in still having an ISA?
Yes, ISAs are still relevant because all of the interest is tax-free and this tax-free status is protected year after year. Everyone qualifies for an ISA, but not everyone has a PSA. We also don’t know how long the PSA will last for. Since the interest you earn from an ISA doesn’t count towards your PSA, the best thing is to save as much as you can and make full use of both.
You can find out more about the Personal Savings Allowance in the savings section of our website, which also includes a useful link to official information from HMRC.
You can find HMRC's 'A guide to the Personal Savings Allowance' here