Personal Savings Allowance
6 April 2016 was a big day for Limited Company contractors, with many new changes affecting their everyday professional lives. One of these changes was the introduction of a new Personal Savings Allowance (PSA) which will see around 95% of taxpayers no longer having to pay any tax whatsoever on their savings income, such as interest.
So what does this mean for Limited Company contractors? In this blog, our Director of Operations, Laura Hepworth, explores how you’re affected, what you need to know and how to make the most from the new PSA.
Back to basics – what is the PSA?
The PSA was introduced by the Government to reduce the amount of tax paid on people’s personal savings income. In short it means that any savings earned in building societies, banks, NS&I products company bonds and credit unions won’t be taxed up to a certain limit.
This is, however, decided upon depending on whether you are a basic, higher or additional rate taxpayer.
Basic rate taxpayers that earn up to £43,000 per year (20%), are able to earn up to a maximum of £1,000 of savings income before any tax is due. Higher rate taxpayers that earn up to £150,000 per year (40%), are able to earn up to £500 of savings income. Unfortunately if you are an additional rate taxpayer, then the allowance it not available to you.
How does the PSA work?
For basic rate taxpayers, banks and building societies used to deduct income tax from the interest earned on accounts (not including ISAs) at a flat rate of 20%. Higher rate taxpayers would see the additional 20% collected through their PAYE code, or when submitting a self assessment tax return. Additional rate taxpayers would have to inform HMRC of how much savings income they’d accumulated through a self assessment tax return, where they’d then pay the additional 25%.
Now it’s a much simpler system. Banks and building societies no longer take the flat rate income tax (20%) from the interest earned and instead they pay you gross and report interest details directly to HMRC.
More trust has been bestowed upon PAYE codes, as HMRC believes this new method will allow people’s tax codes to be identified by the amount of savings income they have earnt in previous years.
Whilst this is good news for those who’s tax code will be adjusted to now include tax free savings, for others who do not receive an income but do generate a savings income, will be expected to submit a tax return.
What happens when you exceed your PSA?
Your PAYE tax code will automatically be adjusted and HMRC will deduct any owed tax from your take home pay.
Should you exceed your PSA limit, you don’t have to wait until HMRC adjusts your code, you can notify them whenever.
Does the PSA have an effect on the £5,000 dividend allowance or existing ISAs?
Good news! As the dividend allowance is separate, it’s not affected. Existing ISAs are tax-free and are therefore also not affected.
What happens when you have a joint account?
Should you have a joint account, then both of you will receive a PSA. If one of you is a basic rate taxpayer and the other a higher rate taxpayer, then as a duo you will receive a PSA of £1,000 and £500 respectively.
How are multiple accounts affected?
HMRC will cross-reference all of the information they gather from each of the banks or building societies you hold accounts with, to understand your tax code and the amount of tax due.
How do monthly cashback / reward schemes affect PSAs?
The PSA includes savings income and interest, but it’s worth understanding that not all banks and building societies are considered as ‘savings income’. For example, if you receive a monthly monetary reward (such as a cash bonus for using a specific banking provider) then this is classed as ‘annual payments’ and are therefore not covered by PSA. So in HMRC’s eyes this means that annual payments are subject to tax.
If you’re not a taxpayer, you’re able to claim back the tax by using an R40 form and returning it back to HMRC.
How is the interest paid on PPI and other compensation payments treated?
Tax is still required to be taken from any compensation interest paid, as it’s not considered to be part of PSA. Whilst this is the case, you may still be able to claim back the tax by completing an R40 and returning it to HMRC.
PSAs can sometimes be confusing, that’s why it’s always useful to have an unlimited source of expert advice at your fingertips. As an Intouch Accounting client, your Personal Accountant is on hand to guide you through the sometimes confusing world of contracting, to ensure you get the best and the most from your career.
Speak to our team today about the tailored, specialist advice and guidance we can offer you, to help you achieve your Limited Company contracting goals.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.