Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
The Personal Savings Allowance Explained (And Why It’s a Great for Investors)
Reading Time: 4 minutesThe Personal Savings Allowance meant changes in interest taxation rules. But what did the changes mean, and how do they affect your savings?
You don’t have to pay any tax on the first £1000 earned in interest. What that really means is, with today’s low interest savings accounts where a ‘good’ rate is still only 1.25%, you need a nest egg of over £80,000 to earn that amount of interest.
Here’s your quick guide to the Personal Savings Allowance (and hints about better ways to invest your cash than easy-access savings accounts!).
- Does everybody get a Personal Savings Allowance?
- How to get the allowance
- Are cash ISAs affected?
- Are ISAs changing?
- Do I get free money for a LISA?
DOES EVERYBODY GET A PERSONAL SAVINGS ALLOWANCE?
The old system meant even basic-rate tax payers would lose £20 for every £100 interest earned. Now, basic rate taxpayers can earn up to £1000 without being taxed!
Higher-rate taxpayers can earn up to £500 in interest before paying tax (at 40% – so £40 on every £100 over the personal allowance).
How do I get a personal savings allowance?
Your banks and building societies pass your information to HMRC to update your tax account.
That means you don’t need to do anything! HMRC already knows which tax band you’re in. You pay tax on anything above your Personal Allowance each year.
If you fill out a Self Assessment form each year because of additional income, such as through renting rooms over the lodger allowance, this is also taken into account.
WHAT ABOUT MY CASH ISA? IS THAT AFFECTED?
No, you can still save up to £20,000 in ISAs, although there’s rather less reason to bother with Cash ISAs now. The ISA limit may go up in future years, too.
All ISA interest is tax-free (it always has been) and it doesn’t count towards your Personal Savings Allowance. Cash ISA savings accounts often have attractive introductory rates for the first year, up to 3% for some, but this drops to negligible rates the following year. You’ll need to keep ahead of this and be sure to move your cash savings to a new ISA each year if you want to maximise your returns. (Check that your current ISA doesn’t have a transfer out fee if you leave within a certain period).
Remember, though, that for long-term investing, stocks and shares do much better than savings accounts so really you would be better off long-term putting your money into a stocks and shares ISA, not a cash ISA. Now that you can keep the first £1,000 of interest that you make, there’s even more reason to put the rest into shares.
Find out how you could be making a LOT more money for your future in a stocks and shares ISA here.
ARE ISAS CHANGING NOW?
ISAs are now ‘flexible ISAs’, allowing you to take money out and replace it before the end of the tax year without it affecting your annual ISA allowance.
It used to be that if you took money out of an ISA and then put it back again within the tax year (April 6th to April 5th) it would count as part of your ISA allowance when you put it back in.
In other words, if you took out £10,000 and then put it back again a few weeks later, you would only be allowed to put in another £5,000 until the end of the tax year. The £10,000 you put back in would be counted as part of the £15,000 (or whatever the ISA limit was) for that tax year.
Now, though, so long as you put the money back within in the tax year, it’s not counted as ‘new money’. This makes them a lot more flexible and encourages us to keep saving!
The ISA allowance for the 2019/2020 tax year is £20,000 so you can put that money in, take it out and put it back in again all within the tax year without penalty.
The allowance resets each 6 April. The Government sets the rate of the allowance each year.
Do I get free money for a LISA?
Lifetime ISAs (LISAs) were introduced in 2017. They’re another way for you to get money out of the Government (if you follow some strict rules).
They act as a savings vehicle either for people wanting to buy their first home (as the Help to Buy ISA applications are now closed for new customers) or for a retirement fund. You can have a cash ISA and a LISA. The thing about a LISA – and how it fits in with the Personal Savings Allowance – is that the bonus payment you get is tax-free. This bonus can be a lump sum of thousands of pounds, too!
A LISA offers potentially great returns – with free bonuses from the Government – if you adhere to the rules. Otherwise, you face an incredibly hefty withdrawal penalty of 25% of the withdrawal amount – meaning you’ll take out less than you saved.
However, they might be a good choice if you’re a first-time house buyer needing to save a deposit, or if you want to save for your retirement. Anyone aged between 18 – 40 can open one.
You can save up to £4,000 a year in a LISA. When you buy your first home (worth less than £450,000), the Government adds a 25% bonus on the total you’ve saved, to boost your house deposit. You’ll need to have had the LISA for a year before you can receive the bonus.
Alternatively, you can save £4,000 a year and withdraw it at the age of 60 – and the Government adds a 25% bonus on the total you’ve saved. You can take the entire amount or partial amounts, always tax-free. However, you don’t have to close the account – it can stay open as long as you like.
It’s worth considering the stocks and shares version of a LISA if you want to use it as an alternative or early-access pension option. You can’t open a LISA over the age of 40. You also can’t access the cash til you’re 60. That means you’ll still have 20 years of investment before you can access the money!
Find out more about stocks and shares investment in our guides here. Or, if you want to look at more investment options to save for your retirement, check out these savings tips for over-50s.
Putting money aside in bank or financial body in hope of earning a potential return is somewhat impossible with rates having a free fall. All allowance on savings does not attract anymore.
With base rate at its lowest level, earning this much of interest for a majority of people is just impossible. Rate needs to improve but the danger is when that happens, government will remove this allowance. Savers have no where to go.
For short-term saving the interest rate is not that important.
For long-term saving, no one should be putting the majority of their money in savings accounts anyway. They should invest in stock market, pensions, property etc – riskier but over time gives a decent rate of return.