With the introduction of the personal savings allowance, taxpayers could be forgiven for assuming that interest on their bank accounts would in future be tax free. Sadly that may not always be the case.
The personal savings allowance (PSA) was introduced on 6 April 2016. For basic rate taxpayers having income up to £43,000, this means they will be able to earn up to £1,000 interest without paying any income tax on it. The figure reduces to £500 for higher rate tax payers whilst those with incomes over £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.
Where the confusion arises is in the nature of the payments made to individuals' accounts by the providers. Instead of, or sometimes in addition to, paying interest, some providers pay reward payments on their accounts. These might be a defined amount per month for keeping a certain level of balance or a certain number of transactions. These payments are either annual payments or miscellaneous income for tax purposes and as such do not come within the PSA. 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, whilst higher and additional rate tax payers will need to understand what is and what is not covered by the PSA and account for the extra tax when completing their self-assessment returns.
On the other hand payments in the form of 'cash back' are not within any of these definitions, are 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.
A further issue arises with fixed term accounts. Interest on these accounts will count towards the PSA when it is earned. But when is that? 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 Beware though where accounts can be closed or interest withdrawn mid-term, as this may result in the interest being earned as it is credited and therefore count towards the PSA in each year.
As always the confusing devil is in the 'simplified' detail.
If you would like to discuss any of these points further, please get in touch with Jackie Hall or your usual RSM contact.