Personal Savings Allowance Hurts Savers (PSA)

Personal Savings Allowance Hurts Savers (PSA)
Papua New Guinea by Julian Cohen. Why?

Although the Personal Savings Allowance (PSA) allows you to earn up to £1,000 per year tax free on your savings, it seems you could miss out

It’s A Mistake To Assume Interest On Your Bank Accounts Will Be Tax Free, Suggests A PSA Tax Exper

The Not-So-Simple PSA

Jackie Hall, a tax partner at a firm of London accountants, warns you could be liable for a tax bill on income you may wrongly assume would be tax free under the Personal Savings Allowance (PSA).

Under the PSA, if your income does not exceed £43,000 (tax year 2016/17), you can earn up to £1,000 interest without having to pay tax on it.  The PSA reduces to £500 if you’re a higher rate tax payer.  And if your income exceeds £150,000, you won’t receive the PSA.

Interest from banks and building societies is now paid without tax deducted.  Any tax you owe is either collected through your PAYE tax code or through your self-assessment tax return.


Or is it?

PSA In A Little More Detail

PSA confusion arises depending on the way in which money is credited to your account.  Whilst interest counts towards the PSA, you may receive other monies.  Here are three examples.

Reward Payments

Reward payments may be added to your account in return for you keeping a defined balance on deposit, or using your account at least a certain amount of times per month.  These are taxable but don’t fall within the PSA.

Cashback payments

Cashback payments are excluded from the PSA, but the good news is these receipts don’t need to be reported as income for tax purposes.

Fixed Term Accounts

You could be hit twice if you save in fixed term accounts, where you receive all of your interest at the end of the term when your original deposit is returned to you.  It’s quite possible you could end up missing out on the PSA for a number of years during the term, and exceeding your limit in the year in which your fixed term account matures.  A double tax whammy perhaps.

Making The Most Of The PSA and Other Allowances

In an insightful article on the subject of making the most of tax-free income, Danby Bloch, chairman at Helm Godfrey observes: “Many people will now be able to have up to £17,000 of income tax free. If they also receive dividends, up to £22,000 of their income could be tax free as a result of the new £5,000 dividend allowance. But it is important to understand how the rules work.”

This article is well worth a read, particularly as it reveals a number of tax planning opportunities, including the PSA.

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