Personal Savings Allowance

Do you run the risk of breaching your personal savings allowance this year?

What is my personal savings allowance?

On 6 April 2016 the tax-free Personal Savings Allowance was introduced for savings income (such as interest) paid to individuals. Most of us have this PSA (Personal Savings Allowance) to utilise each tax year. A tax year runs from the 6^th of April to the 5^th of April the following year. The amount you get is based on other income factors but broadly speaking, it means that a basic rate taxpayer is able to receive up to £1,000 of savings income per tax year, higher rate taxpayers can receive up to £500 of savings income, without any tax being due and additional rate tax payers have a nil rate, meaning they are required to pay tax on all their savings income.

To coincide with the introduction of the Personal Savings Allowance, banks, building societies and National Savings & Investment ceased to deduct tax from the account interest they paid to customers, as in reality with the interest rates so low (0.5% when the PSA was introduced) most people would not need to pay any tax.

The knock-on effect made tax efficient savings accounts like ISA’s almost irrelevant for anyone except people paying the top rate of tax. But as the Bank of England has increased interest rates, 14 times in a row now (currently 5.25%), the rates of interest available on some accounts now mean that individuals may earn more than their Personal Savings Allowance for the first time since they were introduced. E.g., if you are a basic rate tax payer and have more than £16,666.67 in a fixed rate bond for 1 year at a rate of 6%, you would breach your £1,000 allowance meaning that anything more than this would be taxed and if you were a higher rate taxpayer you would only need to have had more than £8,333.33 in the same account to have utilised all your allowance.

So, how does my income effect this?

In addition to this, the tax thresholds across the board have been frozen since 2021 and are currently planned to remain so until 2028 meaning that more people will be pushed into that higher rate tax bracket with only £500 PSA. So, if you have seen your salary increase as some employees have to keep pace with the recent high rates of inflation, this also increases the risk that more savers will face an unexpected tax bill this year. If a saver earned £48,269 in the previous tax year, and received interest of £2,000, they would pay tax on £1,000 of savings – resulting in a bill of £200. 

But if they then got a 6.7% pay rise, they would cross over into the higher-rate bracket, so the same interest would mean 40% tax on £1,500 of savings, landing you with a £600 tax bill.

What happens if I breach my allowance?

The savings providers (banks, building societies etc) will inform HMRC of the interest paid to the individuals that hold accounts with them. If these figures have breached the individuals PSA the HMRC will reclaim the tax owed back via PAYE or pension payments by adjusting your tax code. If you don’t receive pay via these methods then they will generate a bill to be sent to you to pay directly.

Tax efficient savings?

ISA

ISAs are Individual Savings accounts, which by their very nature are savings accounts that you can save into in your own name only (no Joint accounts). ISA’s might be the most well-known tax efficient savings vehicle and after years of decline in use they are making a bit of a comeback. There are various types of ISA and the one you chose will depend on your circumstances. Current options include:

Cash ISA– – You can invest up to £20,000 this tax year 2023/24. These are very similar to any standard savings account that you may already have but any of the interest earned with the ISA is tax free so does not use any of your personal savings allowance, you can find instant access versions with variable rates or ones where you can lock them away for a period of time with a fixed rate.

Stocks & Shares ISA– Like a cash ISA, you can invest up to £20,000 this tax year 2023/24. Clients invest into a Stocks and shares ISA to gain the potential for growth/income above that which may be available in comparison to a Cash ISA and deposit account over the longer term, you do have to consider the risks that are involved to gain that potential advantage before investing in a Stocks and shares ISA.

We believe that investing should be viewed as a longer-term commitment of a minimum of five years, as this allows your money the chance to fully benefit from the ups and downs of the market and the opportunity for your funds to really work for you.

If you are a trying to work out how to save for your future or are considering becoming an investor for the first time you may be daunted by taking a step into the unknown, especially if you have heard about the potential risks involved.

At Blackthorn Financial Services Ltd we understand how to invest, where to invest and can support you on your journey, helping you to achieve the goals for your future, and trying to avoid the mistakes and pitfalls you may make if you attempt to do this by yourself.

Other types of ISA

Junior ISA– You can put up to £9,000 into a Junior ISA each year. A junior ISA is a tax efficient savings or investment wrapper aimed at encouraging families to save for their children’s futures. Any money you put in a Junior ISA will be locked away until your child’s 18th birthday, when it becomes their money (and will become a standard ISA). This can be invested as in the form of a Junior Cash ISA or a Junior Stocks and Shares ISA.

Lifetime ISA– The Lifetime ISA was launched in 2017. Savers must be aged between 18 to 39 to open an account and limits are capped at £4,000 a year, much lower than the £20,000 annual ISA allowance. Savers can deposit up to £4,000 a year into a “LISA” and they will receive a 25% bonus, worth up to £1,000 a year. This is an effective tax break of 25% and is most beneficial for basic-rate and non-taxpayers. The funds can be used to purchase a first home or utilised towards retirement but for all other uses, the funds access would have a penalty applied.

Tax Planning?

Whilst ISAs are one form of tax efficient savings, there are lots of other options which might be more applicable to you in your circumstances. Here at Blackthorn Financial Services Ltd we will create an effective tax plan that makes the best use of your tax position to ensure that you are utilising the relevant allowances and reliefs available and to ensure that the plan works for you now and in the future based upon the information you give us.

To find out more, please contact us.

The value of pensions and investments can fall as well as rise and you may get back less than you invested.