by David Watkinson www.watkinsonblack.co.uk
A small change occurred at the start of the current tax year, but it is one that affects the majority of people in some way.
As from 6th April 2016 banks and other savings institutions have stopped deducting tax at source.
Instead, tax will be payable at the taxpayers marginal rate on interest received. However, a Personal Savings Allowance (“PSA”) has been introduced as follows:
• For basic rate taxpayers the first £1,000 of interest and other relevant savings interest received in any tax year will be exempt from tax.
• For higher rate taxpayers this allowance is reduced to £500 in any tax year
• For additional rate taxpayers, ie people with total relevant earnings in excess of £150,000, the allowance is withdrawn completely
It is estimated that this measure will remove the vast majority of savings income out of the tax net. However, it is important to bear in mind that interest has not been exempted from taxation.
In certain circumstances this may lead to some surprising or unfortunate results. For instance, a married couple may have a joint bank account previously paying total net interest of £1,620.
They will in future receive interest of £1,800 which, as it is divided between them equally, results in them each receiving £900. Assuming that theyare both basic rate taxpayers then this will be tax free as it is below the new PSA. However, if one of the account holders dies then the whole interest will become income of the survivor, meaning that they will have a tax liability on interest of £800.
Similarly, the taxpayer may be a self employed trader with a tax and national insurance liability of just under £1,000. This change in the taxation of interest, especially in connection with the change in the collection method of Class 11 national insurance, may result in the final self-assessment tax exceeding £1,000 resulting in the tax office demanding payments on account. Whilst this does not increase the tax eventually payable it does accelerate the payment of that tax and could result in cashflow problems.
Another source of possible confusion is from a “one-off” interest receipt such as interest on compensation for PPI mis-selling. Previously, basic rate taxpayers would have no additional tax liability above that deducted at source. However, they may well now find themselves with an unexpected tax liability.
Some commentators suggested that this rule change spelt the end of the Individual Savings Accounts (“ISA”). However, by judicious use of an ISA, the interest from which is tax-free, it may be possible to avoid interest received exceeding the new PSA.
WatkinsonBlack are pleased to advise on these and other matters. They have considerable experience in all areas of taxation and businesss services, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us. Please note that these ideas are intended to inform
rather than advise and you should always obtain professional advice before taking any action.
