New tax year 2016: What is the personal savings allowance?
Today marks the start of the 2016/17 tax year, and a major shift in the savings landscape.
The new personal savings allowance is coming into force, meaning from this point on all savings interest will be paid gross.
Previously, any savings interest was taxed at the same rate as income, but now all basic rate taxpayers will receive a £1,000 tax-free allowance, and all higher rate taxpayers will receive a £500 allowance.
The allowance will apply to regular savers, easy access accounts, fixed-rate bonds and any other non-Isa savings accounts or bonds – peer-to-peer lending interest counts too.
Interest earned within an Isa will not count towards the allowance total.
A basic rate taxpayer would need £50,000 saved in such accounts, earning a rate of 2pc, in order to hit the £1,000 limit.
With the current best-buy easy access account, paying 1.45pc, it would take £69,000.
The allowance applies for each tax year.
So where a five year fixed-rate bond only pays out at maturity, the annual rate of return would be used.
The move promises to end tax on savings earnings for the vast majority of the UK population.
And it is likely to make savers consider whether it is best to invest in an Isas as opposed to regular savings options.
More tax-free income than ever
The combination of the new savings allowance , increased £11,000 tax-free personal allowance and £5,000 starting rate on savings means anyone with a total income of less than £17,000 will pay no tax at all on savings income.
There has been some confusion over how tax will collected for those who exceed the personal savings allowance. The gov.uk website states: “HMRC will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do this.”
Those who already self assess will need to continue doing so as normal.