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Guide to Personal Savings Allowance

By Qdos Contractor

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Making use of the tax free savings allowance

From 6th April of this year the introduction of the Personal Savings Allowance will mean that basic rate taxpayers will be able to earn up to £1,000 in savings income tax-free. Higher rate payers will be able to earn up to half as much, ie £500.

Many people will no longer pay tax on savings interest and banks and building societies will stop deducting tax from your account interest.

What counts as savings income?

Apart from the obvious – interest from bank and building society accounts, savings income also includes:

  • interest earned from providers like credit unions or National Savings and Investments
  • interest distributions (but not dividends) 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 ISAs do not count towards your Personal Savings Allowance because it’s already tax-free.

What’s the allowance worth?

The amount of an individual’s Personal Savings Allowance will depend on their adjusted net income.

Adjusted net income is the total taxable income less certain tax reliefs such as:

  • trading losses
  • charitable donations made under Gift Aid
  • pension contributions paid gross
  • additional higher rate tax relief to pension contributions already paid net of basic rate tax relief

Tax Rate

Income Band (adjusted net income)

Personal Savings Allowance

Basic 20%

Up to £43,000

Up to £1,000 in savings income is tax-free

Higher 40%

£43,001 - £150,000

Up to £500 in savings income is tax-free

Additional 45%

Over £150,000

No Personal Savings Allowance

 Examples: basic rate

(i) Earnings £20,000 p.a + £250 bank interest

No tax due on interest as it is less than the £1,000 Personal Savings Allowance.

(ii) Earnings £20,000 p.a + £1,500 bank interest

No tax due on interest up to £1,000 but basic rate tax of 20% will be due on the £500 interest over the Personal Savings Allowance.

Examples: higher rate

(i) Earnings £60,000 p.a + £250 bank interest

No tax due on interest because it is less than the £500 Personal Savings Allowance.

(ii) Earnings £60,000 p.a + £1,100 bank interest

No tax due on interest up to £500 but higher rate tax of 40% will be due on the £600 interest over the Personal Savings Allowance.

No formal claim needs to be made for the Personal Savings Allowance, so you don’t need to take any action now.

Published February 2016