Savers in new tax threat! 18 million could pay tax on bank interest in next Treasury raid

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The personal savings allowance (PSA) helps 95 percent of savers escape income tax on their bank or building society interest. Around 18 million have saved up to £200 a year each since the PSA was launched in April 2016, but there is no guarantee this will continue.

Any move to reduce or scrap the personal savings allowance (PSA) would be yet another blow for savers who are already get a dismal return from cash, due to record low interest rates.

The Government has not openly suggested cutting this tax break, but as investors discovered with yesterday’s surprise dividend tax increase, these days nothing can be taken for granted.

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Sarah Coles, personal finance analyst at Hargreaves Lansdown, said Boris Johnson’s government is looking at every possible way of clawing back as much cash as possible.

“The tax position for savers and investors isn’t going to get more generous, and may well get tougher.”

Under the personal savings allowance, basic rate 20 percent taxpayers can earn up to £1,000 a year interest free of tax, while higher rate 40 percent taxpayers can earn up to £500.

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The PSA applies to bank and building society accounts, government and corporate bonds, and peer-to-peer (P2P) lending interest, but excludes NS&I products, including Premium Bonds.

Any move to squeeze the PSA could come as early as next month, when Chancellor Rishi Sunak launches his three-year 2021 Spending Review and Autumn Budget on October 27.

Coles said this would save the Government relatively little money at the moment, given today’s low savings rates.

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The PSA cost the Treasury £710 million in 2019/20, well below the £3.45 billion cost of Isas. “Once interest rates rise, people will save more tax and the cost of the PSA will increase. Then the Treasury could well consider this a juicier target,” Coles added.

READ MORE:Good news for savers as bank increases ‘table-topping’ interest rates

Under the personal savings allowance, all the interest you receive is paid gross, so your bank or building society does not deduct tax first.

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This has reduced the appeal of putting money into a cash Isa. With interest rates so low, the PSA means that most people do not pay tax on their savings anyway.

Coles said there is still one big attraction of saving in a cash Isa. “If your savings grow, and interest rates finally start to rise, then you could exceed the personal savings allowance at some point and start paying tax. Especially if the PSA is cut.”

With an Isa, you are completely protected from tax but Andrew Hagger, savings expert at MoneyComms.co.uk, said there is a downside. “Interest rates on Cash Isas are quite a bit lower than standard savings rates at present, making the PSA more valuable.”

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If the PSA is scrapped, the balance would swing firmly in favour of cash Isas, Hagger said.

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Maike Currie, investment director at Fidelity International, said yesterday’s move to increase dividend tax by 1.25 percent from next April boosts the appeal of investing inside a Stocks and Shares Isa, where all dividend income is free of income tax and National Insurance.

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Although investors can still generate £2,000 a year of dividends before they pay tax it is better to be safe than sorry.

“This is just the start of the Government tightening its belt as it gears up to pay for the cost of the pandemic. Nothing – not even manifesto promises – are off limits.”

The personal savings allowance may be safe for now, but not even that can be taken for granted anymore.

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Additional rate 45 percent taxpayers do not benefit from PSA, so those earning more than £150,000 a year will pay tax on all their savings.

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