From 6 April 2016, if you’re a basic rate taxpayer you’ll have been able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers are able to earn up to £500. This is called the Personal Savings Allowance.
- most people will no longer pay tax on savings interest
- banks and building societies have stopped deducting tax from your account interest
- If you were already receiving interest without tax being taken off, you’ll no longer need to tell your bank or building society that you qualify for tax-free interest
What counts as savings income
Savings income includes account interest from:
- bank and building society accounts
- accounts with providers like credit unions or National Savings and Investments. It also includes :
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
Interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
Interest from National Savings and Investments (NS&I) tax-free products, namely Fixed Interest Savings Certificates and Index-linked Savings Certificates; and prizes won from Premium Bonds, also doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
If your taxable income is less than £17,000
If your total taxable income is less than £17,000 you won’t pay tax on any savings income.
The amount of your Personal Savings Allowance depends on your adjusted net income.
- If you are a basic rate tax payer then up to £1,00 in savings income is tax free
- If you are a higher rate (40%) tax payer then up to £500 in savings income is tax free
- If you are an additional rate tax payer (45%) then there is no Personal Savings Allowance
Examples: basic rate
- You earn £20,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £1,000 Personal Savings Allowance.
- You earn £20,000 a year and get £1,500 in account interest
You won’t pay tax on your interest up to £1,000. But you’ll need to pay basic rate tax (20%) on the £500 interest over your Personal Savings Allowance.
Examples: higher rate
- You earn £60,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £500 Personal Savings Allowance.
- You earn £60,000 a year and get £1,100 in account interest.
You won’t pay tax on your interest up to £500. But you’ll need to pay higher rate tax (40%) on the £600 interest over your Personal Savings Allowance
What you need to do
You don’t need to do anything to claim your Personal Savings Allowance.
If you’re a basic rate taxpayer and have savings income or interest of more than £1,000 (£500 for higher rate taxpayers), you’ll have to pay some tax on this. But you don’t need to do anything yet.
HMRC will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do this.
If you fill in a Self Assessment tax return you should carry on doing this as normal.
If you require assistance in completing your self assessment tax return please contact us via our contact form