Cash savers stung by savings allowance rules

Cash savers stung by savings allowance rules

Personal savings allowance taxpayers must not assume interest on their bank accounts will be tax free, according to a tax expert.

Jackie Hall, tax partner at London-based accountant RSM, recommended advisers check the details of their client’s bank accounts, after uncovering some terms meaning they could fall foul of a tax bill they previously thought the new personal savings allowance saved them from.

The personal savings allowance (PSA) was introduced on 6 April, meaning basic rate taxpayers with an income up to £43,000 will be able to earn up to £1,000 interest without paying any tax on it.

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The figure reduces to £500 for higher rate tax payers, while those with incomes of more than £150,000 are not eligible for the allowance at all.

Banks and building societies no longer deduct 20 per cent tax from interest payments and any tax due on interest, over the available allowance, is collected either through PAYE tax codes or through the self-assessment tax return.

Ms Hall said where confusion arises is in the nature of the payments made to the accounts by providers.

Instead of, or sometimes in addition to, paying interest, Ms Hall said some providers pay reward payments on their accounts.

She said these might be a defined amount per month for keeping a certain level of balance or a certain number of transactions, adding these payments are either annual or miscellaneous income for tax purposes and as such do not come within the PSA.

Ms Hall pointed out they will continue to be taxable and annual payments will continue to have 20 per cent tax deducted at source, meaning that those with low incomes may still need to make a repayment claim, while higher and additional rate tax payers will need to understand what is not covered by the PSA and account for the extra tax when completing self-assessment returns.

On the other hand, she said payments in the form of ‘cash back’ are not within any of these definitions and not covered by the PSA, but neither do they need to be reported as income for tax purposes.

All this makes choosing the best account very difficult, Ms Hall commented, with further issues arising with fixed term accounts.

“Interest on these accounts will count towards the PSA when it is earned. But when is that?” she asked.

“Generally interest may not be earned until maturity, in which case the PSA may be wasted for some years and exceeded for others.

“Beware though, where accounts can be closed or interest withdrawn mid-term, as this may result in the interest being earned as it is credited and therefore counting towards the PSA in each year.

“As always the confusing devil is in the ‘simplified’ detail,” added Ms Hall.

Patrick Connolly, financial planner at Chase de Vere, said the PSA is to be welcomed, but it was introduced so quickly people are still trying to get to grips with it.