The way your savings will be taxed is changing, and it should leave you better off.
Unless it is held in an ISA (Individual Savings Account) interest on the cash you hold with banks or building societies is currently taxed as follows:
- Non taxpayers: No tax is due (assuming the interest isn’t large enough to make you a taxpayer) and you can apply to have interest paid to you gross, i.e. without the deduction of tax
- Basic rate taxpayers (20%): Interest is paid to you minus a 20% deduction for tax, no further tax is due, providing the interest you have received doesn’t push you into higher rate tax
- Higher rate (40%): Interest is paid to you minus a 20% deduction for tax, you will have a further 20% to pay, which will be arranged through the self-assessment system
However, from 6th April 2016, all of that changes.
The good news is that most people will be better off, the bad news is that the new system looks terribly complicated and is, of course, untested.
From the start of the 2016/17 tax-year a new Personal Savings Allowance will be introduced.
For basic rate (20%) taxpayers allowance it will be set at £1,000 and for higher rate taxpayers (40%) £500, with interest each year from all savings accounts up to those amounts, tax-free. Any interest over the £1,000 or £500 allowance will be taxed at the appropriate rate of 20% or 40%.
Additional rate taxpayers (45%) will not receive the new allowance.
From 6th April interest on all bank and building society accounts will be paid with no tax deducted whatsoever. If your interest is below the allowance in a given tax-year you will need to take no further action. The mechanism for paying tax on any interest above the allowance has yet to be confirmed, although it is thought that for employees it will be reclaimed via the PAYE system and though self-assessment if you are self-employed.
With interest rates so low, the change will mean that for the vast majority of savers all of their interest will now be tax-free.
Naturally, savers will ask whether or not they should now open a Cash ISA (Individual Savings Account) if the interest from their savings is likely to be tax-free anyway.
We will answer that question over the coming weeks in a separate article, except to say that we believe the demise of Cash ISAs is not as close as many people think.
We are here to help
If you would like more information on the new Personal Savings Allowance, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email firstname.lastname@example.org