If you have money in a bank, a building society, or a peer-to-peer lender, discover how you’ll be affected when the Personal Savings Allowance comes into force in April 2016.
The Personal Savings Allowance Is Designed To Reward Savers And Make Things Simple
The Personal Savings Allowance Explained
From April 2016, instead of receiving your interest with basic rate tax paid, you’ll receive your interest gross, with no tax deducted. The Personal Savings Allowance provides you with a tax-free allowance depending on the rate of Income Tax you pay.
The Personal Savings Allowance Rates
If you pay tax at the basic rate of 20 per cent, you’ll have a Personal Savings Allowance of £1,000.
If you pay tax at the higher rate of 40 per cent, you’ll have a Personal Savings Allowance of £500.
If you pay tax at the top rate of 45 per cent, you won’t have a Personal Savings Allowance.
Not All Interest Is Covered By The Personal Savings Allowance
Interest that is already tax-free isn’t counted towards your Personal Savings Allowance, such as ISA interest. However, interest earned from bank accounts, saving accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is included. Peer-To-Peer Lending interest is also covered.
Cash ISA And The Personal Savings Allowance
The Personal Savings Allowance means most people won’t need to use an ISA to benefit from tax-free savings, because their interest will automatically be received without tax having been deducted.
HMRC estimates that 95 per cent of savers will be taken out of tax on their savings, though the figure will reduce if interest rates rise. HMRC provides further information on the Personal Savings Allowance.
For most people, it’s likely to be better to put your money into a high earning Cash ISA first, and then use the Personal Savings Allowance after that. Cash ISAs are protected from tax year after year, so over time, you’ll end up protecting more of your money from tax.
If you’re married, as you will each have a Personal Savings Allowance, you could arrange your deposits between you to maximise the benefit. But whilst spouses can inherit their deceased partner’s ISA and retain the tax-free status, the Personal Savings Allowance won't be able to be inherited.
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