The personal savings allowance
The 2016/17 tax year saw the government provide a major tax boost to savers. Before April 2016 all savings income was taxed at the marginal rate. Now, savers can enjoy reductions in their tax bills thanks to the personal savings allowance.
What is the allowance and how does it work?
The personal savings allowance provides tax advantages for savers. You will pay no tax on up to £1,000 of savings interest. Your allowance is determined by your marginal rate. Basic rate taxpayers get the full £1,000 allowance while higher rate taxpayers can only earn £500 of interest before being taxed.
|
Tax rate
|
Income
|
Personal savings allowance
|
|
Basic rate (20%)
|
Up to £43,000
|
Up to £1,000 tax free
|
|
Higher rate (40%)
|
£43,001 – £150,000
|
Up to £500 tax-free
|
|
Additional rate (45%)
|
£150,000 +
|
No personal savings allowance
|
The amount you can save before your interest is taxed will depend on the interest rate attached to your account. For example, if you’re a higher rate taxpayer (with a personal savings allowance of £500) and you’re saving into a 1.7% fixed rate ISA, you can save £29,400 before your interest is taxed.
Income
The allowance is not limited to interest earned from savings accounts. Any interest derived from open-ended investment companies (OEICs), unit trusts and investment trusts is also covered by the allowance, as is income earned from government and corporate bonds.
ISAs
Any interest earned from an ISA will not be included in your allowance. ISA interest remains tax-free but won’t eat into the personal savings limit. For example, earning £150 interest from an ISA will leave your £1,000/£500 allowance intact.
Contact us
Our team of tax advisers can help you develop a savings strategy tailored to your needs.
Contact us on 01628 631 056 or email tracya@knightandcompany.co.uk for more information.