From April 6th most people in the UK will no longer pay tax on the first £1000 interest generated from their savings or P2P investments.
The new Personal Savings Allowance (PSA) represents a fundamental change in how HMRC treats people’s savings and will apply to a large percentage of the UK population.
From 6th April 2016, if you’re a basic rate taxpayer (earning up to £42,385 a year) you will be able to earn up to £1,000 in interest tax-free.
Higher rate taxpayers who earn between £42,386 and £150,000 will be able to earn up to £500 in interest tax free.
This means that most people will no longer pay tax on the first £1000 interest on their savings or P2P.
With this new allowance, banks and building societies will stop deducting tax from your account interest and Crowdstacker will continue to pay its P2P interest gross.
The great thing is that you don’t need to do anything to claim your Personal Savings Allowance on P2P investments, it will happen automatically.
Here’s how the PSA works:
If you earn, for example, £38,000 a year (making you a 20% basic rate tax payer) and receive £900 in interest in one tax year (in total across savings accounts and other qualifying investments, as well as peer to peer) then you won’t pay any tax on your interest, because it’s less than your £1,000 Personal Savings Allowance.
If you earn £1,200 in savings or P2P interest, £1,000 would be tax free and you would be taxed on the remaining £200.
What does this really mean for my P2P investments?
The easiest way to explain this is to look at an example. If you were a lower rate tax payer (earning under £42,385) and you invested £15,645 in Amicus’s 3-year product at 6.39% p.a., the interest payable at the end of the three-year investment term would be £999.72. Currently you would need to pay the tax man 20% (£199.94) of that.
When the Personal Savings Allowance comes into force on 6th April, you won’t have to pay any tax on what that investment earns. After 6th April, you could invest £15,645 in Amicus 3 year product earning 6.39% pa, and pay NO TAX on your £999.72 interest (as long as you received no other savings or investments interest aside from those in ISAs).
If you had this P2P investment plus other savings such as a savings bank account, which collectively provided you with more than £1000 interest, you would still only pay tax on the interest earned over £1000.
What qualifies as savings interest?
Interest earned through peer to peer lending is covered by the PSA.
Plus any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts is covered.
Dividend income from shares or funds, however, is not included in the allowance.
What if you earn over £150,000?
If you are an additional rate tax payer (meaning you earn over £150,000), then unfortunately you don’t qualify for the PSA.
But you can still open an ISA and benefit from saving up to £15,240 in the 2015-16 tax year, which can be divided between the three available ISA categories – a cash ISA, Stocks and Shares ISA and the new Innovative Finance ISA which covers peer to peer investments.
Where does this leave ISAs?
Remember ISAs are completely separate to the new PSA and are available to everyone who is a UK resident for tax purposes regardless of income.
You can continue to earn tax free interest by placing savings in a cash ISA, Stocks and Shares ISA or the new Innovative Finance ISA (IFISA).
The new IFISA is specifically designed for peer to peer investments, and you will be able to open your IFISA with Crowdstacker once it comes into force on 6th April 2016.