Changes happened on the 6th April 2016 to the way savings income is taxed. From that date savings income, for example interest paid on bank, building society and NS&I accounts will be paid without tax being deducted.
If you have previously had to sign a form R85 to allow your savings income to be paid without deduction of tax it will no longer be necessary to do this and these forms will be discontinued. The Personal Savings Allowance (PSA) is a new allowance. It allows up to £1,000 of savings income to be paid to a basic rate taxpayer free of tax. For a higher rate taxpayer the allowance falls to £500 but additional rate taxpayers are not entitled to any allowance.
The starting rate for savings (SR) is 0% on the first £5,000 however this rate only applies if the total of income derived from all sources, not including savings income, is less than the personal allowance plus the SR plus the PSA, a total of £17,000.
An example would be Freda who has a part time job earning £9,000, plus a small pension of £1,800. She receives £700 in bank interest. Her total non-savings income is £10,800 so below £16,000 being the personal allowance plus the SR. Therefore all of Freda’s bank interest will be free from tax.
If, however, Freda started to receive a second pension of £5,000 her total non-savings income would then amount to £15,800 (£9,000 + £1,800 + £5,000) which means only £200 of her bank interest would be covered by the 0% SR. The balance of her bank interest (£500) would be tax free as it would be part of her PSA.
An individual with income from sources other than savings of over £16,000 but below £43,000 will not receive any of the starting rate but will simply receive the £1,000 PSA or, if the non-savings income is between £43,000 and £150,000, the PSA will be the reduced figure of £500.
These allowances are in addition to the investments which can be made into an Individual Savings Account (ISA). The amount which can be invested in an ISA before 5th April 2017 amounts to £15,240.