Personal Savings Allowance

RG2015

https://www.gov.uk has the following on its website

You may also get up to £1,000 of interest tax-free depending on which Income Tax band you’re in. This is your Personal Savings Allowance (PSA).

However, there is no actual allowance for savings interest. It is either tax exempt (ISA's) or taxable. Depending on other earnings or pension income then you can have up to £6,000 taxable savings interest which will be taxed at 0%. This is made up of the £5,000 starter rate for savings and the £1,000 PSA.

Thanks to posts on this site I believe that I understand how this works but I imagine that most people would find it very confusing. This income remains as taxable income although if it is taxed at 0% it is effectively tax free.

Is there any explanation for calling this an allowance when it is not actually an allowance?

talexuser

It is an allowance because it counts towards your gross income and which tax band you are in, even if some of it ( eg savings interest or share or fund dividends) ends up taxed at 0%. ISAs are tax free because they do not count towards your gross income.

davidwatts

HMRC happy to explicitly refer to it as the "Personal Savings Allowance" and to refer to the amount under that and starting rate for savings as being "up to £1000/£5000 of interest tax free".

https://www.gov.uk/apply-tax-free-interest-on-savings

Presumably they feel that conveys the situation more clearly for the average tax payer than referring to interest being taxed at 0%.

Dazed_and_confused

I think probably only George Osborne knows for certain, it was one of his ideas I think.

The whole thing is very confusing. People with low income cannot use the savings nil rate (PSA).

People with quite high income supposedly get £500 "tax-free" but £500 of savings interest taxed at 0% can add £100 to your overall tax liability. Personally I don't see that as "tax-free"!!

Similar for some High Income Child Benefit Charge payers.

And some people entitled to Married Couple's Allowance.

Same problems occur with the Dividend Allowance, which is actually another 0% tax rate.

Terry_Towelling

Dazed_and_confused wrote: »

People with quite high income supposedly get £500 "tax-free" but £500 of savings interest taxed at 0% can add £100 to your overall tax liability. Personally I don't see that as "tax-free"!!

I've seen this said before. Presumably it is something that only affects HRT payers on the cusp of an even higher tax bracket.

On the subject of the PSA and the Starting Rate for Savings (SRS), it occurred to me that the SRS was specifically positioned as a 'Rate' (rather than an 'Allowance') because there were plans to drop the PSA and increase the SRS rate to something above 0% but less than 20%.

With the banks doing all the 'hard work' reporting interest paid, HMRC would be able apply differential taxation rates on savings interest, there would be less/no need for HRT payers to declare the need to pay more tax and less need for HMRC to deal with low-earners asking for tax refunds on their interest.

Dazed_and_confused

Presumably it is something that only affects HRT payers on the cusp of an even higher tax bracket.

No, it can affect basic rate payers. Probably not many in the grand scheme of things but of its you that's affected that's no consolation.

Elderly married pensioner receiving Married Couples Allowance with £1,000 savings interest taxed at 0%. If their other income is high enough then the savings interest will mean they lose £500 of their Married Couple's Allowance adding £50 to their tax liability.

Obviously this is better than having £200 tax deducted at source by the bank but it's not "tax-free". Well not of me anyway

Dazed_and_confused

Savings starter rate was in place before the savings nil rate (PSA) was introduced and it was 10% at one point a few years ago I think.

Terry_Towelling

Dazed_and_confused wrote: »

Savings starter rate was in place before the savings nil rate (PSA) was introduced and it was 10% at one point a few years ago I think.

Was that about the same time that the starting income tax rate was 10%? Was there any connection between the two?

EthicsGradient

Terry_Towelling wrote: »

Was that about the same time that the starting income tax rate was 10%? Was there any connection between the two?

It was to replace the starting income tax rate of 10%, for people with low income but a substantial part of it from savings (eg many pensioners). The last year of the overall 10% starting rate for income tax was 2007-08, with a band of £2,230; the first for the savings rate was 2008-09, with a band of £2,320 - figures from assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/792502/Table-a2.pdf