The Personal Savings Allowance allows most individuals to earn up to £1,000 of income from their savings tax-free.
Introduced on April 6th2016, The Personal Savings Allowance benefits those earning income from money in savings. Before this date, any income earned from savings was liable to income tax.
As a result of the allowance, most people in the UK can now earn tax-free income from their savings.
What counts as savings income?
The most common type of savings income is interest earned on savings from your bank or building society.
Other types of savings income include:
- Interest from Credit Unions.
- Interest from National Savings and Investments.
- Interest distributions from AUTs, investments trusts, and OEICs.
- Income from corporate bonds and government bonds.
Savings that are already in tax-free savings schemes or accounts like ISAs and Premium Bonds are exempt from the PSA.
How does it work?
The Personal Savings Allowance is available to basic-rate and higher-rate tax payers. Additional-rate tax payers do not receive a PSA.
Basic-rate tax payers receive a tax-free PSA of £1000 per year, whilst higher-rate tax payers receive a tax-free PSA of £500.
This means that any savings income received up to the amount of PSA you qualify for is tax-free. Any amounts over this limit will be liable to income tax.
Prior to the introduction of PSA your bank or building society would have deducted tax from your interest, but since PSA was introduced interest is now paid gross.
If your savings income exceeds your PSA allowance, then in most cases any tax owed will be collected automatically by HMRC via PAYE.
For further help and advice about the Personal Savings Allowance or how to get more from your savings, get in touch with our team of experts here at Michael Bell by giving us a call on 01484 690 730.