The Personal Savings Allowance – MMV301
Personal taxation is changing from April 2016, and the biggest changes are happening to Income Tax. This video tells you what you need to know about the new Personal Savings Allowance. If you have any money stashed away in a bank or building society account, you'll want to watch this..
The Personal Savings Allowance explained
From April 2016, the way you are taxed on the interest you receive on money held in the bank or building society is changing…
- If you are a basic rate taxpayer, the first £1,000 of interest you receive each year will be tax free.
- If you are a higher rate taxpayer, the first £500 of interest you receive each year will be tax free.
- If you are an additional rate taxpayer, you get no Personal Savings Allowance at all 🙁
Because of this change, banks and building societies will no longer hold back tax on interest they pay you – instead interest will be paid gross.
What you should do
Everyone gets this allowance, so if you are in a relationship where you're happy to shift money around between you, make sure that both your personal savings allowances are used.
You may also be able to get a better rate outside of an ISA than inside one. As weird as it may sound, it might actually pay you to shift money out of an ISA if you can get a better rate. Certainly, more choice of accounts for your money will be available now.
A better idea is to consider ISA re-stocking. From April 2016 you will be able to take money out of an ISA and replace it into the ISA without losing the tax-efficient status, as long as you do so within the same tax year. Why might this be useful?
Let's say you have money in Cash ISAs not earning very much interest, and you have some shares or funds held outside an ISA. You could shift the money out of the Cash ISA and into an ordinary account, taking advantage of the Personal Savings Allowance to get tax-free interest anyway. Then you could shift the equivalent value of shares into a Stocks & Shares ISA without actually using your ISA allowance.
The new rules provide much more flexibility for shifting money around to take advantage of the tax-free allowances. But moving money often comes at a cost, such as dealing fees on shares you hold. Make sure you understand the costs of moving money before you agree to do so.
And as ever, seek professional advice if you are in any doubt about any of this – it's too important to get wrong! And for more detail, this is a great summary from those bright people at Deloitte.