The personal savings allowance – what you need to know

The personal savings allowance – what you need to know

Save smarter with up to £1,000 tax-free interest on your savings

Are the days of paying tax on our savings behind us? A new ‘personal savings allowance’ came into force on 6 April this year, meaning many Brits will no longer have to pay tax on interest earned in their bank or building society accounts.

The allowance was introduced by the Chancellor in his 2015 Budget, and should make it easier for many of us to save smarter. Here are the key things you need to know…

Q: How much is my personal savings allowance?

Ah, the big question. And the answer depends on what rate of tax you pay:

Under the new rules, if you’re a basic rate taxpayer (with an annual income of up to £32,000) you’re allowed to earn £1,000 in savings interest without paying tax on it, while higher rate taxpayers can earn £500 in interest before being taxed.

The only people who don’t get an allowance are additional rate taxpayers.

Q: How will this help me save?

Because it will allow your savings to grow a little more, essentially.

In the past, basic rate taxpayers had to pay the taxman £20 on every £100 in interest they earned in a normal bank or building society savings account. Higher rate payers, meanwhile, used to pay £40. But under the new rules, many of us won’t pay any at all tax on this interest – meaning more money stays in your account.

Q: How much can I have in my account before paying tax?

Here’s a table showing how much you could have in an ordinary savings account before you’ll have to pay tax on the interest:

Annual rate of interest

Basic rate taxpayer

Higher rate taxpayer

0.5%

£200,000

£100,000

1%

£100,000

£50,000

1.5%

£66,667

£33,333

2%

£50,000

£25,000

2.5%

£40,000

£20,000

3%

£33,333

£16,667

Q: Is it just interest from my bank account that’s covered?

No. The allowance covers any interest you earn from bank accounts, building societies, credit union accounts, corporate bonds, government bonds and gilts, and interest from peer-to-peer lending. It also includes interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts, and most types of purchased life annuity payments.

However, interest from any cash ISAs you have isn’t counted towards your allowance, because it’s already tax-free.

Q: Do I need to do anything to benefit from this?

In a word, no. The government says you don’t need to do anything to claim your personal savings allowance. And if you fill in a self-assessment tax return, you should continue doing this as normal.

Q: So, is there any point in cash ISAs now?

Yes. Even with the new tax-free personal savings allowance, one big benefit of cash ISAs is their simplicity. Cash ISAs are completely tax-free, so you don’t need to keep track of how much interest you’ve earned, and you don’t need to mention them on your tax return (if you complete one).

Q: Even with the allowance, interest rates are pretty low right now. Is there any way I could make my money work harder?

A good question. And the answer depends on what your savings goals are, and how long you have to save for them. If you have some longer term goals in mind then you may want to consider putting your money in an investment – such as our Aviva Stocks & Shares ISA – to help it grow.

All investments involve some degree of risk, as their value can go down as well as up and you may not get back as much as you originally invested.

This article is not intended to give advice or a personal recommendation. If you’d like a personalised recommendation based on your circumstances, you should seek financial advice. You can find a financial adviser in your area at www.unbiased.co.uk

For more tips to help you make more of your money, visit our Save Smarter hub. And if you’re thinking of investing, visit our investments page here.

BR01172 04/2016

 

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