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24/05/17Do you know how much your Personal Savings Allowance is?

This is a PSA about the PSA.

If we drop the acronyms, it means a Public Service Announcement about the Personal Savings Allowance. It’s slightly more of a mouthful but, admittedly, it makes a tad more sense.

The Personal Savings Allowance (shortened to PSA from here on in) is often misunderstood, but could save people money. H M Revenue & Customs (HMRC) refers to it as the biggest shake-up in savings accounts for a generation, so what exactly is it? And more importantly, how can it save you money?

What is the PSA?

In the past, any interest accrued from a savings account was taxed at your usual rate, with basic-rate taxpayers losing 20% and higher-rate taxpayers losing 40%, and additional-rate taxpayers losing 45%. The PSA has changed that. From the 6th of April 2016, depending on your tax rate, interest received will now be tax-free up to a certain amount.

  • For basic-rate taxpayers, the allowance is £1,000
  • For higher-rate taxpayers, the allowance is £500
  • Additional rate taxpayers do not receive an allowance

The allowance means that an estimated 95% of people will no longer get taxed on any income they receive from their savings. To be clear, saving income counts as:

  • Interest from banks
  • Interest from building societies
  • Interest from other account providers such as credit unions and Peer-to-peer (P2P) lending platforms
  • Income from company bonds

It is also worth noting that any income from an Individual Savings Account (ISA) will not count towards your PSA.

How much will it save me?

The main advantages for the PSA lie in the fact that you are no longer restricted to an ISA-based savings product if you want to avoid paying tax. It now puts the interest rates from savings accounts and current accounts on a level playing field to ISAs, with a certain amount of interest being tax-free.

Savings accounts and Cash ISAs are currently experiencing a period of low interest rates. There are, however a few savings accounts and even current accounts, that offer higher rates, providing you fit various requirements such as minimum and maximum deposit amounts.

Taking an easy access savings account fixed at 1.15% as an example would see:

  • A basic-rate taxpayer being able to save £86,950 before exceeding the allowance
  • A higher-rate taxpayer being able to save £43,500 before exceeding the allowance

A fixed rate savings account with a slightly more favourable interest rate of 3% would see:

  • A basic-rate taxpayer being able to save £33,333 before exceeding the allowance
  • A higher-rate taxpayer being able to save £16,666 before exceeding the allowance

For those looking to put away a large amount of money, the PSA opens a lot of possibilities that an ISA won’t be able to compete with, in terms of both interest rate and the amount you can deposit.

What do I have to do?

Nothing.

Well, that is if your interest income falls below your allowance. HMRC predicts that only 5% of savers will go over their allowance, and therefore have to pay tax on the additional income. This payment will be made using changes to the individual’s tax code, meaning that the PAYE system will automatically work out the payment needed, or a breakdown will be created on a self-assessment form.

The remaining 95% will have no action to take. Banks and Building Societies will contact HMRC to confirm that you are under the limit and your taxation will carry on, business as usual.

Is it a trap?

No.

Well, maybe…

The PSA will encourage many people to leave the shelter of an ISA and venture out towards alternative savings options. Whilst this might leave many better off because of the of higher interest rates available and the ability to save more than the £20,000 ISA limit, some people question how secure this will be.

If the PSA is reduced, or even scrapped, it could leave many savers with large amounts of interest that are no longer sheltered by an ISA and could be liable for taxation. This may be a cynical way to view the new allowance, admittedly, but nevertheless it is a possibility.

So, is this the end for the ISA?

The ISA has been chugging along now for 18 years. The tax-free wrapper of an ISA is the main draw for many, so will the PSA cancel out the main benefit?

Put simply, no. The ISA is an established savings vehicle that appears to be under little threat from Government policies and remains available to higher-rate taxpayers and additional-rate taxpayers.

For most savers therefore, filling up their Cash ISA each year makes sense. When they have done that, they can take advantage of the PSA through banks or building societies. Any queries about the PSA can be answered by seeking professional advice.