10 March 2016

Personal Savings Allowance (PSA)

As of 6th April 2016, the rules for paying tax on interest are changing with the introduction of the Personal Savings Allowance. We look at how an estimated 95% of people will no longer have to pay income tax on interest they earn.

What were the rules before April 2016?

If your total income was over £15,600 per year, you paid tax on any interest you made from savings accounts and any other products such as currents accounts. Cash ISAs didn’t count as you pay no income tax on the interest earned from these products.

What are the new rules?

From 6 April 2016, basic-rate taxpayers will receive a Personal Savings Allowance (PSA) of £1,000. This will be £500 for higher rate taxpayers, whilst additional-rate taxpayers (ie those earning above £150,000) will not receive an allowance. Interest earned on cash ISAs won't count towards your PSA, because it's already tax-free.

This means that each tax year, you may earn up to £1,000 or £500 in interest in a non-ISA account before you have to pay tax. Banks and building societies will no longer deduct income tax from your savings and current account interest.

Illustrations of how the Personal Savings Allowance works

The following examples relate to interest on non-ISA savings and current accounts:

Ellie earns £23,000 a year and makes £350 in interest. After April 2016, she won’t have to pay tax on the £350 as it is beneath her £1,000 PSA.

Raj earns £27,000 a year and makes £1,500 in interest. After April, he won’t have to pay tax on the first £1,000 of his interest, but he will have to pay 20% tax on the remaining £500.

Jocelyn earns £70,000 a year and makes £1,200 interest. After April, she won’t have to pay tax on the first £500 of her interest, but she will pay 40% tax on the remaining £700 of her interest.

Chrissie earns £160,000 and makes £500 interest. After April, she will continue to pay 45% tax on her interest.

What about dividends?

If you receive dividend payments from stocks and shares, they will not be included in the new Personal Savings Allowance. A new, separate £5,000 dividend allowance is being introduced.

What should I do?

You won’t have to do anything. You get to keep all the interest on your savings and current accounts up to the £1,000 and £500 thresholds, and pay tax on anything over them. For more information on your tax liability please visit the HMRC website.

So is it still worth having an ISA?

Cash ISAs remain a good option if you have lots of savings or if you’re looking to save over a longer period of time. Whilst most savers in the short term will benefit from the PSA, some could see their annual interest begin to exceed their allowance over time as either their savings grow, interest rates rise or they move to a different income tax tier.

ISAs on the other hand allow customers to grow their savings over time and the protection is more certain, being based on the amount of savings within the ISA rather than the interest received. Any interest earned on an ISA doesn't count towards your PSA.

Additionally, if you have been saving into ISAs for years and have built up a large pot of savings, the ISA will continue to provide tax-free interest whereas holding the same amount in a non-ISA account could incur tax.

Nationwide’s view

‘There is still a place in the market for cash ISAs,’ says James Broome, Head of Product Management. ‘The consensus view is that in the short term, the PSA won’t make a huge impact on the cash ISA market. They’ll still be an important way for people to save in the longer term.’

‘Cash ISAs are completely tax free – so you can use all your ISA allowance and then save into a non-ISA account as an overflow. Bear in mind that any unused ISA allowance is gone at the end of a tax year. Although the PSA allowance may seem quite generous, this may change in future, as your savings grow or interest rates rise.’

The tax treatment will depend on your personal circumstances and this may be subject to change in the future.

How we can help

If you think you could benefit from saving with a Nationwide Cash ISA, see our full range or find out more about our other savings accounts.

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