The Government is introducing a new Personal Savings Allowance from April 2016, letting savers earn up to £1,000 of tax-free interest on their non-ISA savings. The Treasury estimate that implementation of the Personal Savings Allowance will abolish tax on interest for 95% of savers. Here, we look at how it will work and what it could mean for you.
Announced in the March 2015 Budget, the tax-free Personal Savings Allowance comes into effect in April 2016. From then on, banks and building societies will pay interest on non-ISA savings without deducting any tax. For basic rate tax payers, the first £1,000 of interest earned on non-ISA savings will be tax-free and, for higher rate tax payers, no tax will be payable on the first £500 of interest earned. Additional rate tax payers will not be eligible for the Personal Savings Allowance.
This will vary depending on the interest rate that you’re earning on your savings. Today, the most competitive interest rates available in the market on One Year Fixed Rate savings accounts are close to 2.0%. On a non-ISA account paying 2.0%, you’d start to earn interest above the Personal Savings Allowance with a balance of £50,000 as a basic rate tax payer or £25,000 as a higher rate tax payer. If rates reach 5%, as they did in 2007 before the financial crisis, savings over £20,000 would earn more than the Personal Savings Allowance for a basic rate tax payer and over £10,000 for a higher rate tax payer.
While there is a limit on how much you can save into an ISA in each tax year - known as the ISA allowance, currently set at £15,240 - you can build up a substantial amount of ISA savings over a number of years and the interest is currently protected from tax year after year. This is one of the most valuable features of ISAs, particularly in a higher interest rate environment. If you already have, or if you’re planning to build up a large pot of cash savings, you might want to consider using your ISA allowance first.
This hasn’t been confirmed yet. The Government is consulting on how best to implement the new Personal Savings Allowance. One of the key aspects of this consultation is how to allow for the reporting and collection of tax on non-ISA savings income in excess of the Personal Savings Allowance.
For your Paragon Bank savings, the quickest way to check your interest is to login and select Manage Account. Within each Paragon Bank savings account, select Interest Statement and this will let you see how much interest you’ve earned on that account in the current tax year, the previous tax year or a custom period selected by you.