This new 2016/17 allowance was mentioned in the Budget 2016 Report at point 2.58.
At Budget 2015 in March, Mr Osborne announced the introduction of the new Personal Savings Allowance (PSA) from 06 April 2016. Legislation will be introduced via the Finance Bill 2016 to amend the Income Tax Act 2007 and introduce a new 0% ‘savings nil rate’.
The PSA provides an additional allowance for taxpayers in 2016/17 as follows where their adjusted net income means that they are a Basic or Higher rate taxpayer:
|Personal Savings Allowance||2016/17|
|Basic rate taxpayers||1,000|
|Higher rate taxpayers||500|
(The PSA is not available where adjusted net income means that the taxpayer pays at the Additional rate).
As a result of the new PSA, interest on savings income paid or credited on or after 06 April 2016 will be paid free of an Income Tax deduction. Savings income is defined as interest from:
- bank and building society accounts
- accounts with providers like credit unions or National Savings and Investments
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
- income from government or company bonds
- most types of purchased life annuity payments
Coupled with the existing £5,000 0% tax-free savings band, the PSA means that where total taxable income is £17,000 or less in 2016/17, no tax will be payable at all on savings income – i.e. £11,000 personal allowance + £5,000 tax-free savings band + £1,000 Personal Savings Allowance. In effect, for 2016/17, the PSA applies as follows:
|Taxable Income||Marginal Rate||Personal Savings Allowance|
|Less than £17,000||0% or Basic (20%)||1,000|
|£17,001 to £43,000||Basic (20%)||1,000|
|£43,001 to £150,000||Higher (40%)||500|
|Over £150,000||Additional (45%)||NIL|
Note that the PSA is in addition to the ISA allowance.
The consideration is that all interest that is paid from 06 April 2016 will be paid gross, e.g. by banks and building societies. As such, HMRC have issued revised tax codes based upon anticipated savings interest in 2016/17, taking into account the new allowance:
- Some people will have seen their tax code increase, meaning that HMRC anticipate that interest will be within the new allowance (£1,000 for Basic and £500 for Higher rate payers)
- Others will have seen a decrease, meaning that HMRC anticipate that interest will not be within the new allowance
In the event of queries, employees need to be advised to contact HMRC directly regarding their tax code:
- Telephone 0300 200 3300, or
- Online at 2016/17 PAYE Coding Notice Query