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The New Personal Savings Allowance

From April 2016, HMRC introduced a tax-free Personal Savings Allowance of £1,000 (or £500 for higher rate taxpayers) on the interest that you   earn on your savings.

To be eligible, for the £1,000 tax-free Personal Savings Allowance, your taxable income needs to be less than £42,700 a year.

To be eligible for the £500 tax–free Personal Savings Allowance, your taxable income needs to be between £42,701 and £150,000 a year. 

Examples, provided by HMRC are as follows:

 Example 1

If you earn £20,000 income a year and £250 in interest

From April 2016 you won’t have to pay tax on your interest as it is within your £1,000 Personal Savings Allowance.

Example 2

If you earn £20,000 income a year and £1,500 in interest

You won’t need to pay any tax on your interest up to £1,000, but you will still need to pay tax on the £500 interest you have earned over your Personal Savings Allowance. You will pay tax at the 20% savings rate.

Example 3

If you earn £60,000 income a year  and £250 in interest

You won’t have to pay tax on your interest as it is within your £500 Personal Savings Allowance.

Example 4

If you earn £60,000 income a year and £1,100 in interest

As a higher rate tax payer you won’t have to pay tax on your interest up to £500, but you will still need to pay tax on the £600 interest you have earned over your Personal Savings Allowance. You will pay tax at the 40% savings rate.

Please note that from April 2016, banks and building societies will stop automatically taking 20% in income tax from interest earned on your non-ISA savings.