The end of the 20 percent tax credit

From 6 April 2016, savers will no longer pay income tax on interest they receive from certain deposit accounts. This is due in large part to the introduction of the Personal Savings Allowance (PSA) on the same date. The PSA is worth £1,000 to basic rate taxpayers and £500 to higher rate taxpayers. So, if you are a basic rate taxpayer, and your bank interest is below £1,000, you will pay no tax on the interest you received. If you are a higher rate taxpayer, you will pay no income tax on interest received as long as it does not exceed £500.

Prior to 6 April 2016, deposit takers, in the main banks and building societies, were required by law to deduct tax at 20% from any interest they paid to depositors. As a significant number of depositors receive interest under the PSA limits, this tax credit is to be scrapped and all interest payment will be made without deduction of tax.

 Here’s HMRC’s notes to the draft clause that will enact the PSA in the Finance Bill 2016:

“Deposit – takers (such as banks) and building societies, currently deduct 20% from the account interest they pay, under the Tax Deduction Scheme for Interest (TDSI). Similarly, National Savings and Investments (NS&I) currently deduct sums representing income tax at the basic rate from the interest it pays on certain bonds. For these purposes, returns on certain alternative finance arrangements are treated in the same way as interest.

At Budget 2015, the government announced the introduction of a new Personal Savings Allowance (PSA) from 6 April 2016. Once the PSA is implemented, most individual savers will no longer be liable for tax on any of the savings interest they receive. The government therefore also announced that, alongside the introduction of the PSA, it would end the duty on banks, building societies and other institutions (including NS&I) to deduct sums representing income tax from account interest paid or credited to customers.”