A new personal savings allowance (PSA) will be introduced in 2016. It is a relatively minor change, but one which could have far reaching implications. What exactly is happening and what do you need to look out for with your clients?
From April 2016 the new personal savings allowance (PSA) (see Follow up ) allows basic rate taxpayers to receive up to £1,000 in savings income before tax is due. Higher rate taxpayers get a £500 band; additional rate taxpayers have nothing. This is expected to take 95% of savings out of the tax net. At the same time, the tax deduction scheme for interest (TDSI), under which basic rate income tax has been deducted from most savings accounts, stops. What happens to non-TDSI savings income has yet to be decided.
PSA applies to savings income (defined in s.18 ITA 2007 ) - a definition far from straightforward. It covers:
- interest (per ch.2, ITTOIA 2005 ; excluding relevant foreign income charged on remittance basis)
- purchased life annuity payments (under ch.7, pt.4 ITTOIA 2005 )
- profits from deeply discounted securities (under ch.8 ITTOIA 2005 )
- accrued income profits (under ch.2, pt.12 ITA 2007 ); and
- gains from contracts for life insurance (under ch.9 ITTOIA 2005 ).
Not all savings income falls within s.18 . Therefore, it’s going to be harder to know what’s taxable and what isn’t.
PITFALLS FOR YOUR CLIENTS
Clients moving between basic, higher and additional rate bands will find more savings income becomes taxable, as it progressively falls outside PSA.
Pro advice. Watch out for clients moving between basic, higher and additional rate bands, as the additional tax will be higher than expected.
Some clients may be used to receiving a refund of tax deducted at source, and so are eager to file their returns as early as possible to speed this up. From April 2016 savings income will normally be received gross - increasing tax bills. Some clients will therefore receive a bill for rather than a refund of tax. This may mean they no longer have an incentive to file early, which may increase pressure for you in January.
Pro advice. Not all tax deduction at source was through TDSI. HMRC has suggested alternatives, but it’s possible that all tax deduction at source on savings income will stop. Self-assessment tax bills will then increase for clients with significant savings income.
The R85 system will also cease, so unexpected tax liabilities on survivorship joint savings accounts is again a possibility. A surviving party receiving all the income may incur a liability, where half-shares didn’t.