6th April 2016 saw the introduction of the Personal Savings Allowance (PSA), which enables most savers to earn up to £1,000 interest each year, tax-free. Previously, tax on interest was paid net of 20% and then subject to your marginal rate (0-45%).
Interest earned from bank and building society accounts, corporate bonds and government bonds, as well as peer-to-peer lending, is included in the new PSA and will be paid gross in future.
Please note: The PSA is separate from the Dividend Allowance.
|Tax band*||Personal Savings Allowance||Any interest earned above the PSA will be taxed at:|
|Basic rate taxpayers||£1,000||20%|
|Higher rate taxpayers||£500||40%|
Paying tax on interest over this amount
Any interest earned in excess of the PSA will be taxed at the marginal rate (20%, 40% and 45%).
Joint account holders
The PSA is for each individual. Joint account holders will have the interest split equally between them. This means that two basic rate tax payers could have a joint account paying up to £2,000 interest and not have any further tax liability.
If the account holders are in different tax bands, it gets slightly more complicated. For example, interest earned of £1,500 would incur a tax liability for a higher rate joint account holder as it would be split £750 each. The higher rate payer only has a PSA of £500 whereas the £1,000 PSA of the basic rate holder would leave £250 unused – or available for use in another account.
All a bit complicated?
Remember that an ISA wrapper negates the need for any of these considerations:
Read more about the benefits of the ISA