What is a Personal Savings Allowance (PSA)?
Foxes talks to Iain Murray of True Potential Wealth Management LLP about the new Personal Savings Allowance (PSA) everyone will be entitled to from April 2016.
What does that mean though?
Well, simply put, it means a majority of people won’t be paying any tax on the interest they receive from non-ISA deposit accounts. A new allowance of £1,000 per annum for basic rate taxpayers (£500 per annum for higher rate taxpayers) means that the interest that you receive up to this amount will effectively be tax free. You would of course still need to pay the tax on any interest over and above this.
What happened before?
You may (or indeed may not) have noticed that when you get interest on your savings, there is always a deduction for the payment of basic rate tax (currently 20% rate). A higher or additional rate payer would need to declare this income and pay the additional tax, whereas a basic rate taxpayer would have no further liability; a non taxpayer could claim it back, or complete an R85 form to ask the bank or building society to pay the interest to you “gross”, meaning no tax taken off. With the new rules, all interest will be paid gross from April onwards.
Do I need to bother with an ISA then?
Well, for interest up to £1,000 per annum, there will be almost be no difference whether it’s in an ISA or a non-ISA savings account in the sense that you will receive a gross interest payment in each, and you would not be liable for any tax payment (for a basic rate taxpayer). A word of caution though: Interest Rates are at all time historic lows. You’d need around £100,000 in a bank account with interest of 1% before you need to start concerning yourself with paying tax. However; as and when interest rates start to rise (which they will – when and by how much I can’t tell you), with only a modest increase in the rates, it will bring down the amount of capital you would need before you start to pay tax i.e. if interest rates went to 2%, then you would be paying tax on anything over £50,000 that you were earning interest on. If the money was in an ISA, then there would not be any tax to pay, regardless of the balance or interest rate (based on current rules). Also, spouses can inherit ISA’s in the future, but they can’t inherit the PSA.
Foxes is an appointed introducer of Iain Murray at True Potential Wealth Management. Iain offers advice in all of the financial areas that matter to you and your business, including Auto Enrolment, Life Insurance and Investment Management. For full information and service disclosures, please visit the website below.