From 6th April 2016, if you’re a basic rate taxpayer you’ll be able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers will be able to earn up to £500.
How will this work?
From 2016/17 the Savings Allowance (SA) will apply to savings income (savings income is income such as bank and building society interest). Income within the SA will be taxed at a new 0% rate (the ‘savings nil rate’). However the available SA in a tax year will depend on the individual’s marginal rate of income tax.
Individuals taxed at up to the basic rate of tax will have an SA of £1,000.
For higher rate taxpayers, the SA will be £500.
No SA is due to additional rate taxpayers.
Alongside the introduction of the SA, banks and building societies will cease to deduct tax from account interest they pay to their customers.
The only catch is that you must include the savings income when you are working out whether you’re a basic, higher or additional rate taxpayer.
The new SA will be exempt from tax interest receipts for many taxpayers. The government anticipates that around 95% of taxpayers will not have any tax to pay on their savings income. However, the allowance works in a complex way. For example, a taxpayer whose total non-savings income is near to £43,000 in 2016/17 (the point from which higher rate taxes are payable) needs to be aware that savings
income is still added to other income to determine whether the SA is £1,000 or £500.
Examples: basic rate
You earn £20,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £1,000 Personal Savings Allowance.
You earn £20,000 a year and get £1,500 in account interest
You won’t pay tax on your interest up to £1,000. But you’ll need to pay basic rate tax (20%) on the £500 interest over your Personal Savings Allowance.
Examples: higher rate
You earn £60,000 a year and get £250 in account interest
You won’t pay any tax on your interest, because it’s less than your £500 Personal Savings Allowance.
You earn £60,000 a year and get £1,100 in account interest.
You won’t pay tax on your interest up to £500. But you’ll need to pay higher rate tax (40%) on the £600
interest over your Personal Savings Allowance.
If you have any queries on the above, or would like to discuss this in more detail, please contact Sarah Salton on 01925 761 600 or email her at: email@example.com