As we move into the new tax-year, research has shown that most savers are unaware of the new way savings are taxed.
From 6th April, the new Personal Savings Allowance will mean savers pay less tax on the interest they receive on their savings. However, new research by AA Financial Services, has revealed that 90% of savers are unaware of the new arrangements and therefore could be paying too much tax.
Are you in the dark? Here’s everything you need to know.
How does the Personal Savings Allowance work?
Before the introduction of the Personal Savings Allowance, tax was deducted from the interest you received on your savings at a rate of 20%. Higher rate taxpayers then had to pay an additional 20% or 25% via self-assessment. Basic rate taxpayers could apply to have the tax refunded, or, in some cases, apply to have the interest paid gross, with no tax deducted whatsoever.
However, the Personal Savings Allowance changes all that.
From 6th April basic rate (20%) taxpayers will pay no tax on the first £1,000 of interest they receive; for higher rate (40%) this is cut to £500.
There are no changes for non-taxpayers.
All fine so far, but is it that simple?
No, confusion reigns!
As the research shows, 90% of savers are unaware of the changes, which could have two nasty consequences.
Firstly, from 6th April all interest is paid gross, with no tax deducted. If your savings interest is above the £1,000 or £500 threshold, it is up to you to inform HMRC, who will adjust your PAYE tax code.
As the new system beds in, it is therefore vital that all savers carefully check their tax code to ensure it is correct. No one wants to pay too much tax, equally, being hit for an unexpected tax bill, because you have paid too little, is also unpleasant.
Secondly, many ‘traditional’ savings accounts pay better rates of interest than Cash ISAs. Some experts are concerned that, unaware of the new Personal Savings Allowance, savers are using Cash ISAs (Individual Savings Accounts) and losing out on the best interest rates.
So a ‘traditional’ savings account is better?
Perhaps, but then again, perhaps not; we told you it was confusing!
Savers need to compare the ‘net’ return on both Cash ISAs, where no tax is paid on the interest, and ‘traditional’ savings accounts, with tax only paid on interest above £1,000 or £500.
However, savers should also remember that the new Personal Savings Allowance could easily be withdrawn in the future, as could of course Cash ISAs, although we believe the latter to be unlikely give the changes the Government has made to this poplar savings option over the past few years.
If this were to happen, savers who have not used their Cash ISA allowance for a number of years could be left with savings outside of the tax-free shelter and therefore face a higher tax bill.
What action should you take?
If you have savings outside a Cash ISA we would suggest you take the following steps:
Step 1: Check to ensure your bank or building society is paying the interest gross, without the deduction of tax
Step 2: Calculate whether or not your interest is above the £1,000 or £500 threshold applicable to your specific rate of tax
Step 3: Check that your tax code is correct, if in doubt, speak to your tax office for further information
At the same time, it also makes sense to check you are getting the most competitive rate of interest on any existing Cash ISAs and savings held in more ‘traditional’ accounts.
We’re here to help
If you are confused about the new Personal Savings Allowance, or would like advice on whether or not to use a Cash ISA or ‘traditional’ savings account, we are here to help.
Call Sarah or Bev today on 0115 933 8433 or email firstname.lastname@example.org