Learn how Cash ISAs, the Personal Savings Allowance, Premium Bonds, and the starting rate can help you save money and avoid paying tax on it. Tax on savings is something that is overlooked, after all. Often, there is no tax at all, thanks to something called a Personal Savings Allowance (PSA), which removes or decreases the amount most people will pay on their savings, regardless of where they are held.
However, that isn’t the only account or allowance that allows you to earn interest tax-free. The PSA and other savings options in the UK work as follows.
Tax On Savings – The Basics
You may not realise it, but the interest you make on your savings is theoretically taxable at your tax rate. You must pay tax if your annual income is greater than £12,570.
If you’re a basic rate taxpayer who earns £100 in interest over the course of a year, you’ll pay £20 in tax. Higher-rate taxpayers (those earning more than £50,270 per year) would be charged £40.
Cash ISAs, the Personal Savings Allowance, the starting rate for savings, and finally Premium Bonds are four strategies to avoid paying HMRC.
Tax On Saving – Cash ISAs
The Cash ISA is the one that most people are familiar with. An ISA (Individual Savings Account) is a sort of tax-free savings account, and the Cash ISA (as the name implies) is for cash savings rather than investments.
There is an annual ISA allowance, which caps the amount you can put into one each year at £20,000, although it resets for new deposits each April. That implies that money invested in an ISA will continue to earn tax-free interest year after year.
This is why so many individuals believe they require an ISA for their money. For a long time, it was the best place to keep your cash. But there’s also the Personal Savings Allowance, which has been in place since 2016 (so quite some time) (PSA).
Personal Savings Allowance
If you’re a basic rate taxpayer, you receive a £1,000 interest allowance before you have to pay tax. The Personal Savings Allowance is £500 if you’re a higher-rate taxpayer. The PSA is not available to additional rate taxpayers.
When you consider current interest rates, the typical £1,000 limit is enormous. Hopefully, as frequent readers, you have your easy access savings in an account paying at least 0.6 percent, which has been the best rate for the last several months, give or take. Before you start paying tax on the interest, you’d need a huge £166,666 in that account.
Tax On Savings – Move Your Money Around?
If you haven’t moved your money in a while, it could be sitting in an account that pays as little as 0.1 percent interest (or worse). Before you hit the PSA ceiling, you’d need ONE MILLION POUNDS.
Of course, you’ve probably moved your money around in a few other accounts, some of which may pay as much as… 2% (don’t get too enthusiastic just yet). You might also be a higher rate taxpayer with a £500 PSA. The amount saved will be less, but you’ll still need to build a sizable savings account before taxes become a concern.
Here’s how much money you’d need to save at various rates to earn £1,000 or £500 in interest.
Savings Tax Allowances
For low-income people, there’s a third level that eliminates interest tax. Interest gained earns you an extra £5,000 allowance, albeit how much you get depends on your wage.
You must earn less than £17,570 to be eligible, and the overall sum is a little difficult. Anyone earning less than £12,570 per year is entitled to the entire £5,000 annual allowance.
The beginning rate is then reduced by £1 for every £1 earned over £12,570. As a result, someone earning £15,570 a year would lose £3,000 from the allowance, leaving them with a total earning potential of £2,000.
This is in addition to the PSA, which is valued at £1,000.
Tax On Saving – Premium Bonds
The Premium Bond is the last account that will pay you tax-free returns. While there is no assurance of interest, any prizes you win are tax-free. These should equal or better the interest rate on the top easy-access accounts if you have an average rate of luck and more than £5,000 saved.
A maximum of £50,000 can be held in a PB by a person.
