For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Quick guide to the Personal Savings Allowance
At the Summer Budget in 2015, George Osborne had multiple nuggets of good news for investors in peer-to-peer lending (P2P), most notably the announcement of the new Innovative Finance ISA (IFISA). But one which may have snuck under the radar was the announcement that a new Personal Savings Allowance (PSA) – like the IFISA – will be introduced from 6 April 2016. It represents one of the biggest savings changes in a generation, as it means that around 95% of people will no longer be paying tax on savings as a result.
Indeed, this hugely significant tax efficiency on savings income means that basic-rate taxpayers will be able to earn £1,000 in interest on savings without having to cough up a penny to HMRC (ie: a maximum saving of £200 each year). Their higher-rate taxpaying counterparts will enjoy a corresponding threshold of £500, which in turn also equates to a maximum annual saving of £200.
However, it must be noted that additional-rate taxpayers will not be eligible for the PSA.
What is classified as ‘savings income’?
Many people might not be aware of the fact that the scope of the Personal Savings Allowance extends well beyond current or savings accounts. Interest earned on credit union accounts, building societies, corporate bonds, government bonds, gilts and other currencies are all covered within the umbrella of the PSA, along with most types of life annuity payments too.
Significantly, interest on peer-to-peer lending loans is also included, offering an important boost for consumers who choose to lend through a platform like ours. Given that returns on most stocks and shares won’t be afforded this same protection from tax, it represents a major coup for the P2P sector and its lenders.
How do I claim my Personal Savings Allowance?
Quite simply, ‘claiming’ your PSA won’t require you to lift a finger, as the process will be an automated one set up by HMRC. So that means if you are a basic-rate or higher-rate taxpayer, you will receive gross interest on your savings without owing any tax, provided the total remains within your respective annual threshold.
In the event that your savings income exceeds this threshold you may be able to pay any tax owed through your PAYE tax code, depending on the amount owed. The account provider – be that the bank, building society, P2P lending platform etc – will provide HMRC with the information they need to do this, and in order to cover any tax due on savings interest, your personal allowance will automatically be reduced.
For those who usually fill in a Self Assessment tax return each year, you should continue doing so as normal, albeit that a new digital system will soon be replacing the annual tax return.
Using your PSA and your (IF)ISA in tandem
Some may be wondering if it is still worthwhile making use of an ISA (or IFISA in the case of peer-to-peer lending). Though we are not in a position to offer tax advice and you should always seek advice from a tax or financial advisor, there is no reason why the two can’t be used together in order to maximise your tax savings. In the case of peer-to-peer lending you can subscribe as much of your annual ISA allowance to an IFISA with a platform like ours as you wish, and then invest another significant sum of money into a non-IFISA P2P account, and still end up not having to pay any tax (provided your interest earned in the non-IFISA P2P account does not exceed £500 or £1,000, and you have no other savings that earn interest).
For example, at an annualised rate of return of 5%, you could invest £20,000 of lending capital as a basic-rate taxpayer (assuming you do not have any other savings income) into a non-IFISA P2P account, and not owe a penny to HMRC – thus equalling a maximum total tax-free investment in P2P loans of up to £35,240 a year (if you invest in an IFISA as well). For a higher-rate taxpayer, the maximum covered by the PSA in this case would be £10,000, and the maximum total tax-free investment in P2P would fall to £25,240. Still, it’s a handsome amount of money to shield from tax.
Bear in mind too that, unlike the PSA, there is no limit on the amount of interest you can receive tax free under an ISA.
Anything else I need to know?
The PSA is largely as simple and automated as it sounds. All those over the age of 18 are eligible, and the rules are unchanged for pensioners. Couples may also be interested to note that if they have a joint bank account while paying different rates of income tax, any interest earned in this account is assumed to be split down the middle, and the PSA shared equally.
Other than that, there really isn’t much more to it, although we would strongly advocate speaking to an authorised tax advisor if you wish to find out the best way of incorporating the PSA into your portfolio. But, suffice it to say, the Personal Savings Allowance has rightly been hailed as a positive change by UK savers. It will reduce both complexities in the system and the number of tax returns needed at the end of each year, while increasing the amount of pennies ending up in our pockets. For consumers, this can only be a good thing.
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