The Personal Savings Allowance was introduced on 6th April 2016. Rather than the previous mish-mash of banks either paying interest to customers net of 20% withholding tax or just paying interest gross, most savers are now granted a tax-free allowance for the savings income. Your allowance is based on your income tax band (2018/2019):
Income between £11,850 and £46,350 - 20% income tax. Personal Savings Allowance of £1,000
Income between £46,351 and £150,000 - 40% income tax. Personal Savings Allowance of £500
Income above £150,001 - 45% income tax. No Personal Savings Allowance.
This was welcomed by savers as they could now enjoy tax-free savings income – up to a limit – on top of their ISA allowances. At the time of its launch, the government said the Personal Savings Allowance would take approximately 95% of the UK population out of paying tax on savings.
ISA accounts – such as the SynerGIS Bond ISA – are unaffected by the Personal Savings Allowance. Despite there being a yearly cap on amounts which can be held in an ISA, all income from holdings within them is tax-free.
However, holders of some fixed rate savings accounts should be careful. The HMRC had made reference to the fact that interest income counts towards a savers Personal Savings Allowance when it “arises”. This is not necessarily the same as when it is paid into the fixed rate savings account. If the saver cannot access this cash – as dictated by the terms and conditions of the product – then it cannot be counted towards that year’s Personal Savings Allowance. This becomes important for some 3-year, 4-year, 5-year fixed rate savings
accounts / bonds where all the interest “arises”, or is made available to the client at the end of the term.
Receiving five years’ worth of interest in one tax year could easily use up your Personal Savings Allowance and you will pay tax on the excess at your marginal rate. If the interest income is available but via paying an early access penalty clause, this still counts as being technically accessible and therefore one can use this for their current year’s Personal Savings Allowance.
This issue recently affected some holders of the NS&I Pensioners Bonds – the first of which matured in January 2018 – and was complicated further by the differing calculations depending on when savers invested in the product.
If you breach your Personal Savings Allowance, you can either pay the tax as part of your Self-Assessment return or the bank informs HMRC who then adjust your tax code accordingly.
Any meaningful investment in fixed rate bonds or long-term savings accounts with interest paid at maturity (or with restrictions on accessing interest) need extra analysis. As you may be paying tax on the returns in excess of that year’s Personal Savings Allowance, the headline rate you think you are getting needs to be adjusted down for tax purposes.
SynerGIS Bonds keep things simple. As well as our ISA wrapper where you can invest up to £20,000 tax-free each year, we pay your interest semi-annually directly to your nominated bank account, enabling you to optimise your annual Personal Savings Allowance as part of your wider financial plan.