Business

Personal savings allowance - how to go about claiming it

QUESTION: Several of my clients have asked me about the personal savings allowance. What is this and how can my clients claim it?

ANSWER: From April 6 this year a basic rate taxpayer will be able to earn up to £1,000 in savings income tax free. Higher rate taxpayers will be able to earn up to £500. This is called the personal savings allowance. This means that most people will no longer pay tax on savings interest and banks and building societies will stop deducting tax from interest bearing accounts.

Savings income includes interest from bank and building society accounts and accounts with providers like credit unions or National Savings & Investments. It also includes interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts, income from government or company bonds and most types of purchased life annuity payments.

Interest from individual savings accounts (ISAs) doesn't count towards the personal savings allowance because it's already tax free. Equally this also applies to interest on National Savings & Investments tax free products, namely Fixed Interest Savings Certificates and Index-linked Savings Certificates; and prizes won from Premium Bonds, also doesn’t count towards the personal savings allowance because it's already tax-free.

The allowance is dependent on whether you're a basic, higher or additional rate taxpayer. Additional rate taxpayers are not entitled to the personal savings allowance. Taxpayers do not need to do anything to claim the personal savings allowance. A basic rate taxpayer with savings income or interest of more than £1,000 (£500 for higher rate taxpayers), will have to pay some tax on this.

Taxpayers should be aware that savings within the personal savings allowance can push them into a higher income tax band. Where a taxpayers non-savings income, which would generally be income from work (whether employed or self-employed), is below the higher-rate threshold but your savings income would take you above it you first must add up your income from work and income from earned savings interest to get your total income.

If that total income puts you in the higher-rate band (starts at £43,000 in 2016/17) then you are a higher-rate taxpayer and you only get the £500 of personal savings allowance (similarly for those at the additional-rate threshold – you wouldn't get the personal savings allowance at all).

You don’t need to do anything to claim your personal savings allowance. If you’re a basic rate taxpayer and have savings income or interest of more than £1,000 (£500 for higher rate taxpayers), you’ll have to pay some tax on this. But you don’t need to do anything yet.

HMRC will normally collect the tax by changing your tax code. Banks and building societies will give HMRC the information they need to do this. If you fill in a self-assessment tax return you should carry on doing this as normal.

:: Janette Burns (j.burns@pkffpm. com) is associate director at PKFFPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.