From 6 April 2016, most adults in the UK will be able to earn up to £1000 of interest a year on their savings, without paying tax on it. This new Personal Savings Allowance, announced in the 2015 budget, will affect everyone with any savings. Here, we look at how the new allowance will affect you.
The new personal savings allowance is good news for savers. Currently, for every £100 of interest earned, a basic-rate taxpayer will pay £20 in tax; a higher rate payer will pay £40. However, the new allowance means that every basic-rate taxpayer can earn £1,000 worth of interest without paying any tax on it at all, (higher rate taxpayers can earn £500 of interest without paying tax and there is no allowance for additional rate taxpayers).
Interest from ISAs does not count towards your personal savings allowance because it is already tax-free but personal allowance applies to any interest paid from bank accounts, building societies, credit unions and National Savings and Investments, as well as interest from annuity payments and other savings and investment trusts which pay interest.
Interest that relates to periods before 6 April 2016 but paid afterwards will not have tax deducted.
Will I need to complete a form to receive my interest tax-free?
No – not when the new changes are introduced. At the moment, banks and building societies deduct the tax that your savings earn before paying interest into your account and to receive your interest tax-free you need to complete a R85 or R105 form. However, the good news is that from 6 April 2016, you will not need to complete any forms at all.
If you fill in a self-assessment tax return, you should carry on doing so and include any income from savings on your return.
What if my savings income is higher than my allowance?
If you have any savings income which exceeds your personal savings allowance, you will have to pay some tax on this. HMRC will normally collect the tax by changing your tax code.
If you need any further information on these changes, see our FAQ sheet or visit the personal savings allowance section on the Government website www.gov.uk