New tax threat on savings! 18 million could pay taxes on bank interest | Personal finance | Finance

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The Personal Savings Allowance (PSA) helps 95% of savers evade income tax on their bank or building society interest. About 18 million saved up to £200 per year each since the launch of the PSA in April 2016, but there is no guarantee that this will continue.

Any move to cut or scrap the Personal Savings Allowance (PSA) would be another blow to savers who are already getting a dismal return on money, due to historically low interest rates.

The government has not openly suggested reducing this tax relief, but as investors discovered with yesterday’s surprise dividend tax hike, nothing can be taken for granted these days.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said Boris Johnson’s government was considering all possible ways to claw back as much money as possible.

“The tax situation for savers and investors will not become more generous and may well get tougher.”

Under the Personal Savings Allowance, 20% base rate taxpayers can earn up to £1,000 a year in tax-free interest, while higher 40% rate taxpayers can earn up to £500.

The PSA applies to bank and building society accounts, government and corporate bonds, and interest on peer-to-peer (P2P) loans.

Any move to compress the PSA could come as early as next month, when Chancellor Rishi Sunak launches his 2021 triennial spending review and autumn budget on Oct. 27.

Coles said it would save the government relatively little money at the moment, given current low savings rates.

The PSA cost the Treasury £710m in 2019/20, well below Isas’ £3.45bn cost. “Once interest rates go up, people will save more taxes and the cost of PSA will go up. So the Treasury may well see that as a juicier target,” Coles added.

READ MORE: Good news for savers as bank hikes ‘table top’ interest rates

As part of the personal savings allowance, any interest you receive is paid gross, so your bank or building society doesn’t deduct tax first.

This reduced the appeal of putting money in an Isa crate. With interest rates so low, the PSA means most people don’t pay tax on their savings anyway.

Coles said there’s always been a big draw to saving up in a cash Isa. “If your savings increase and interest rates finally start to rise, then you could go over the personal savings allowance at some point and start paying taxes. 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 was a downside. “Interest rates on Cash Isas are currently somewhat lower than standard savings rates, making PSA more valuable.”

If the PSA is scrapped, the scales would tip firmly in favor of the cash Isas, Hagger said.

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Maike Currie, chief investment officer at Fidelity International, said yesterday’s decision to raise tax on dividends by 1.25% from next April boosts the attractiveness of investing in a Stocks and Shares Isa, where all dividend income is exempt from income tax and national insurance.

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

“This is just the beginning of the government tightening its belt as it prepares to pay the cost of the pandemic. Nothing – not even manifesto promises – is off limits.

The personal savings allowance may be safe for now, but even that can no longer be taken for granted.

Taxpayers at the additional 45% rate do not benefit from the PSA, so those earning more than £150,000 a year will pay tax on all their savings.

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