In a bid to improve its scant communications on the imminent changes, HMRC has issued a policy paper outlining details of the new tax-free personal savings allowance (PSA) to be introduced for savings income, such as interest, paid to individuals.
Under the new rules basic rate tax payers will be able to receive up to £1,000 of savings income, and higher rate taxpayers can receive up to £500 of savings income, without any tax being due. The PSA will not be available to any saver with additional rate income. Alongside the introduction of the PSA, banks, building societies and NSamp;I will cease to deduct tax from account interest they pay to customers.
HMRC calculates that around 18m savers will benefit from a tax reduction on their savings income, on average by £25 each year. It is anticipated that around 95% of taxpayers will not have any tax to pay on their savings income.
Around one million individuals are expected to still have tax to pay on their savings income after the PSA has been introduced. Most will be additional rate taxpayers or individuals with higher than average savings. For example, with an interest rate of 2% a basic rate taxpayer would need to have around £50,000 of non-ISA savings before they have any tax to pay on their interest.
Legislation will be introduced in Finance Bill 2016 to amend the Income Tax Act 2007 (ITA) and introduce a new 0% rate (the 'savings nil rate') for savings income received by individuals. This new nil rate will apply to savings income within an individual's 'savings allowance'.
An individual's savings allowance in a tax year will be £1,000, except where either: they have 'higher rate income' but no 'additional rate income' in the year (in which case their allowance will be £500); or they have any additional rate income in the year (in which case their allowance will be nil).
Income from an ISA, and income which qualifies for the 0% starting rate for savings at section 12 of ITA, will not use up any part of an individual's savings allowance.
Income that is within an individual's savings allowance will still count towards their basic or higher rate limits - and may therefore affect the level of savings allowance they are entitled to, and the rate of tax that is due on any savings income they receive in excess of this allowance.
Alongside this new savings nil rate, deposit-takers, building societies and NSamp;I will no longer be required to deduct sums representing income tax from account interest they pay to customers.
Individuals who are unlikely to have tax to pay on their bank or building society interest will therefore no longer have to register with their account provider to have this interest paid without deduction.
According to HMRC's own analysis, the introduction of the new savings allowance will see a £1.32bn drop in tax receipts in 2015/16, levelling off to a reduction in the tax take of between £565m and £675m each year up to 2019/20.
In the policy paper, HMRC says this may feed through to higher consumption or savings in the household sector.
The HMRC personal savings allowance policy paper is here