No tax on interest on savings
For as long as we can remember, banks and building societies have been required to deduct basic rate tax from interest paid to savers. Only certain accounts, such as tax-free ISAs or child trust fund accounts, receive interest with no tax deducted.
From 6 April 2016 all banks and building societies will pay interest with no tax deducted – for any type of savings or current account. However, only the interest paid into designated tax-free accounts will be exempt from tax in the hands of the saver. All other bank interest will continue to be taxable at various rates.
To avoid savers having to pay tiny amounts of income tax on the bank interest they receive, the rate of tax payable in most cases will be 0%. This rate will apply to any interest falling within the saver's Personal Savings Allowance (PSA), Personal Allowance (PA), or starting rate tax band.
In 2016/17 the PA will be £11,000, the PSA will be £1,000 (basic rate taxpayer) or £500 (higher rate taxpayer), and the starting rate band will be £5,000. However, the starting rate band doesn't apply where non-savings income exceeds £16,000.
Taxpayers with income over £122,000 don't have a PA and taxpayers with income of £150,000 or more don't have a PSA, so the 0% tax rate doesn't apply to top earners.
It's all a bit complicated, and many banks haven't got to grips with the new rules yet. We can help you understand how much tax you will have to pay on interest you receive next year.