The new tax year brings with it the usual selection box of changes, many of which will cause clients to seek input from their financial adviser.
The changes include the single-tier state pension, changes in relation to inheritance tax, the new living wage, stamp duty, capital gains tax and personal savings allowance (PSA) to name but a few. As always, tax changes can affect people differently according to what tax bracket they are in. The PSA is no exception. Until now, in normal savings, for every £100 interest earned, £20 was automatically taken off as basic-rate tax, higher-rate taxpayers would later lose another £20 during tax self-assessment and additional rate tax payers another £25. From 6th April it's all change...
The new personal savings allowance (PSA) means all basic-rate taxpayers will be able to earn £1,000 a year interest on all savings tax-free. For all higher-rate payers the limit is £500. This looks simple, but within the way it works there is an anomaly that can mean a small number of people would be better off earning less interest.
From 6th April the standard personal allowance (the amount you can earn tax-free from any source) increased to £11,000. You then pay 20% tax on the next £32,000. This means that most people will start paying higher-rate tax only if they earn over £43,000, however this amount isn’t just for earned income from work; it includes earnings from other sources such as rental income, self-employment and interest from savings accounts (not ISAs).
In other words you need to add up all your income, including savings interest, as that is what defines how big your PSA will be. If your total income is below £43,000 you get a £1,000 PSA, if it’s above you get £500.
That’s the easy bit, however Martin Lewis at www.Moneysavingexpert.com illustrates where it becomes a bit trickier for individuals to calculate their tax position in the following scenarios:
|Scenario 1: Near the limit but not over it
Income from work: £42,000, Interest from savings accounts: £990 Total income: £42,990, so less than the higher-rate threshold, therefore the PSA is£1,000
Total amount of interest earned after tax: £990 as all your interest is covered by the PSA
In this scenario all of your savings interest would be tax-free.
|Scenario 2: You earn £20 more savings interest, but take home LESS
Income from work: £42,000, Interest from savings accounts: £1,010 Total income: £43,010, so you are a higher-rate taxpayer, therefore the PSA is £500
Total amount of interest earned after tax: £906 (£500 tax-free, £500 taxed at 20% and £10 taxed at 40%)
Bizarrely, the fact you’ve earned slightly more interest means that because a chunk more of it is taxed you actually end up taking home less. You would actually have been slightly better off to have earned £10 less interest! Remember there is nothing more taxing than tax!