Keeping it personal: the new savings allowance

Will you ever have to pay tax on your savings again? There’s a new personal savings allowance (PSA) coming into effect from 6 April, which allows basic-rate taxpayers to earn up to £1,000 worth of interest on savings and pay no tax.

It was introduced by the Chancellor in last year’s Budget and even higher-rate taxpayers are getting in on the act: they’ll be able to earn up to £500 savings’ interest and pay no tax.

Those with a low income won’t have to pay any tax on savings. To qualify for that, you’ll need a taxable income of less than £17,000 a year.

Even better, you don’t need to do anything to claim your Personal Savings Allowance.

Even if you earn enough interest to have a tax payment – more than £1,000 or £500 if you’re a higher-rate taxpayer – HM Revenue & Customs will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do that.

On top of that, any savings you have in an ISA won’t count towards your allowance, so if you have a decent amount of savings, thinking ahead, it may still be worth opening up a cash ISA.

But bear in mind that current best-buy savings accounts are paying paltry rates, in the region of 1 to 1.5 per cent. It means you would need significant sums invested before needing to worry about paying tax on your savings. In fact, adults could save up to £69,000 before having to pay tax on the interest after the new allowance comes in, reckons Moneysupermarket.

It calculates basic-rate taxpayers can accumulate as much as £68,965 and not pay any tax on the interest with the current top-paying easy access saving account from RCI Bank, which offers 1.45 per cent. Higher-rate taxpayers using the account would be able to save £34,482 before reaching the £500 taxable interest threshold.

If you save through the leading fixed-term bond from Charter Bank, which currently pays 1.91 per cent, basic-rate taxpayers can save £52,355 while higher-rate taxpayers can save £26,177 before having to hand over anything to the taxman.

Kevin Pratt, consumer affairs expert at Moneysupermarket, said: “The personal savings allowance is a gift for consumers, most of whom will not pay any tax whatsoever on their savings from next week, and savers should make the most of it.”

However, if you have smaller amounts to save – up to a maximum of £20,000 – you may actually be better off with an interest-paying current account. Nationwide’s FlexDirect account offers 5 per cent AER on balances up to £2,500, while Santander’s 123 account pays 3 per cent AER on balances between £3,000 and £20,000.

Analysts from Defaqto point out that even with the £60 annual fee on Santander’s 123 account, you’d get more back in interest and benefits than the very best instant-access cash ISA.

But banking on such a good deal continuing could be an expensive mistake. The Spanish-owned bank has already whacked up the monthly cost of the account from £2 to £5 this year, which suggests that it won’t hesitate to increase charges further or reduce the benefits of the account in the future.

Brian Brown, head of Defaqto Insight, said: “Although rates are currently better in non-Isa vehicles, with the Santander 123 current account taking the crown, there are no guarantees that Santander will carry on paying interest at the level currently on offer.

“On top of that, consumers need to be aware that by choosing the current account route, they are risking their ISA rights and will forgo the potential to keep their savings completely sheltered from the taxman if interest rates do rise in the future and they surpass the tax-free limit of £1,000.”