What is the new Personal Savings Allowance and how do you claim it?
From 6 April 2016, all basic rate taxpayers, i.e. those with income under £43,000, will be able to earn up to £1,000 in personal savings income tax free. Higher rate taxpayers, with earnings over £43,000, will be able to earn up to £500. This is called the Personal Savings Allowance. If you are fortunate enough to be an additional rate taxpayer, i.e. with earnings over £150,000, paying 45% tax, you are not entitled to the Personal Savings Allowance.
Therefore, most people, including non-taxpayers, will no longer pay any income tax on their savings interest arising from the likes of banks and building societies. In fact, from 6 April 2016, banks and building societies will no longer deduct income tax at 20% from interest paid on savings accounts. Interest will be paid gross. Previously, non- taxpayers, those i.e. earning less than £11,000 pa, had to claim not to have tax deducted. If they did have tax deducted then they’d have to make a year-end tax claim.
Savings income includes interest earned from bank and building society accounts and institutions like credit unions and some National Savings and Investments products. It also includes interest (but not dividends) from authorised unit trusts, open-ended investment companies and investment trusts, income from the UK government (gilts) or company bonds (borrowings) and most types of purchased life annuity payments.
Interest from Individual Savings Accounts (ISAs) can be ignored as it is tax free and the interest does not use up any part of the annual Personal Savings Allowance. Similar, for interest from National Savings and Investments tax free products, like Fixed Interest Savings Certificates, Index-linked Savings Certificates and Premium Bonds winning can be ignored as they are already tax-free.
You do not need to do anything to claim the Personal Savings Allowance. Interest on savings less than the £1,000, or £500 for higher rate taxpayers, can essentially be ignored from a tax view point.
Taxpayers will normally pay any tax liability on surplus interest above the £1,000 or £500 amounts through their tax codes or via self-assessment Tax Returns.