Introduced at the beginning of this tax year, the Personal Savings Allowance (PSA) was heralded as a tax incentive for cash savers trying to earn some extra income on their savings. Basic rate tax payers are entitled to earn up to £1,000 interest tax free per year with any additional interest taxed as normal. For higher rate tax payers, the interest falls to £500 and if you earn over £150,000, there is no tax incentive.
Cue the small print….
The Personal Savings Allowance only applies to interest and not to any reward payments. These might be paid by a bank or building society and they might look like interest payments but in fact they are incentives paid by these institutions to encourage maintaining particular sums of cash on deposit – but it still looks like interest!
If the actual interest is just 1% and the reward payment is 2%, then any interest generated from the 2% will not qualify as part of the Personal Savings Allowance.
One example is the Halifax Monthly Reward Account which gives a £5 per month reward for switching to their current account. HMRC has ruled that these payments do not constitute interest and therefore they are not covered by the PSA. And as a result, this payment is subject to income tax. (It is worth noting that non tax payers can claim this tax back by submitting a completed R40 for to HMRC). If in doubt, ask your Building Society or Bank.
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