Who is likely to be affected
Individuals who receive savings income, such as interest on bank or building society accounts.
Banks, building societies and other institutions that deduct tax from the interest they pay, under the Tax Deduction Scheme for Interest (TDSI).
National Savings and Investments (NS&I) and individuals who receive interest on NS&I savings products with tax deducted (such as the 65+ Guaranteed Growth Bond).
Representatives of trusts, estates and other bodies that currently receive bank or building society interest with tax deducted under TDSI.
General description of the measure
On 6 April 2016 a tax-free Personal Savings Allowance (PSA) will be introduced for savings income (such as interest) paid to individuals. Broadly, this means that 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 NS&I will cease to deduct tax from account interest they pay to customers.
The measure will reward and support savers by reducing the tax that they pay on savings income.
Background to the measure
The measure was announced at March Budget 2015.
On 15 July 2015, HM Revenue and Customs (HMRC) published a consultation document ‘Deduction of income tax from savings income: implementation of the Personal Savings Allowance’. This consultation ran until 18 September, and the government published its response on 9 December.
The measure will have effect for savings income paid on and after 6 April 2016.
Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) imposes charges to income tax on most savings and investment income.
Savings income is defined at section 18 of the Income Tax Act 2007 (ITA) and includes interest from savings accounts held with banks, building societies, NS&I and credit unions; as well as interest distributions from authorised unit trusts and open-ended investment companies. Savings income also includes income which is equivalent to interest, such as the profit on government or company bonds which are issued at a discount or repayable at a premium, and income from certain alternative finance arrangements. Other types of savings income include purchased life annuity payments and gains from certain contracts for life insurance.
Savings income paid to an individual is usually chargeable at the basic, higher or additional rate of income tax. However, section 12 of ITA provides for a 0% starting rate of tax to apply in certain cases. In addition, individuals may save in an Individual Savings Account (ISA) each year without incurring any tax on interest or gains.
Part 15 of ITA imposes duties to deduct a sum representing income tax at the basic rate from certain payments. This includes a requirement (in Chapter 2 of Part 15) that deposit-takers (such as banks) and building societies deduct such sums from the interest they pay on certain savings accounts and investments. Deduction requirements under Chapter 2 of Part 15 are implemented through the operation of the TDSI system.
Chapter 2 of Part 15 also allows for regulations to be made so that individuals who are unlikely to be liable for tax on their savings interest can supply a certificate to their account provider, and thereby register to receive this interest without deduction. The Income Tax (Deposit-takers and Building Societies) (Interest Payments) Regulations 2008 (SI 2008/2682) sets out the arrangements for such registration. Alternatively, individuals who are not liable to pay tax on their savings interest may reclaim from HMRC amounts that have been deducted.
In addition to these Chapter 2 deduction requirements for deposit-takers and building societies (TDSI), Part 15 of ITA includes other provisions that require the deduction of sums representing income tax from certain payments of savings income, including interest paid on certain bonds issued by NS&I.
Legislation will be introduced in Finance Bill 2016 to amend 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)
they have any additional rate income in the year (in which case their allowance will be nil)
For this purpose, higher rate income is income on which tax is charged at the higher or dividend upper rate, or would be but for the operation of this new savings nil rate or the dividend nil rate (which will also be available from 6 April 2016). Additional rate income is income on which tax is charged at the additional or dividend additional rate, or would be but for the savings or dividend nil rates.
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, Part 15 of ITA will be amended so that deposit-takers, building societies and NS&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.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.2 of Budget 2016 as ‘Savings tax: allowance and ISA flexibility’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside March Budget 2015.
The measure will reduce income tax on savings for low and medium income individuals, improving incentives to save and increasing real household disposable incomes. This may feed through to higher consumption or savings in the household sector. There is likely to be some increased take-up of interest-bearing savings assets as a result of this measure.
Impact on individuals, households and families
Around 18 million 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. There will be no additional tax costs for any saver.
Individuals who are not liable to pay tax on their savings income will no longer have to register with their bank or building society so their interest can be paid without tax deducted. In addition, many savers will no longer need to reclaim amounts that have been deducted from their interest.
Around 1 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.
Most individuals who will have tax to pay on their savings income currently complete a self-assessment tax return - and should continue to declare any tax due using this return. It is not anticipated that this change will significantly increase the number of individuals required to complete tax returns as HMRC will also introduce automated coding out of certain savings income that remains taxable through the Pay As You Earn (PAYE) system. Alternative methods of settling any tax due, such as through payment of an HMRC assessment, will also be available.
The measure is not expected to impact on family formation, stability or breakdown.
The PSA will be available to all individuals other than those with additional rate income, and no adverse impact is anticipated in respect of any group with protected characteristics. The measure is expected to provide the greatest benefit to basic and higher rate taxpayers receiving significant amounts of savings income. It is recognised that some savers in vulnerable circumstances may require help to understand the changes to the current rules, and how they will be affected. It is therefore important that HMRC communications are suitable for intended audiences.
Impact on business including civil society organisations
Deposit-takers (such as banks) and building societies will no longer have to operate TDSI as a result of these changes. They will therefore not be required to deduct tax from interest they pay on their savings accounts, or to register any accounts for interest to be paid without deduction. NS&I will also no longer have to deduct tax from the interest it pays on its savings products.
While there are likely to be familiarisation and one-off costs - including training staff, communicating with customers and making systems changes - the introduction of the PSA and the ending of deduction is expected to lead to significant ongoing cost savings for banks, building societies and NS&I. Some information has been received from these institutions about the costs and savings associated with this measure. However, this information is limited, and not sufficient to enable an assessment of the total impact across all businesses. HMRC will continue to work with businesses and their representatives to fully quantify the impacts.
The savings nil rate is designed for individuals, and will therefore not affect the tax chargeable on interest paid to any business or civil society organisation. It is not anticipated that ending tax deduction by banks and building societies will create significant additional burdens for businesses, given that these organisations already receive bank and building society interest without deduction.
There may however be administrative impacts for trusts and estates. While no trust or estate will face additional tax charges as a result of these changes, some trustees or administrators of estates that do not currently complete a tax return to HMRC may incur new reporting burdens once TDSI deduction ceases. HMRC will be putting in place interim arrangements regarding trustee returns, returns for estates in administration and payments made under informal arrangements. This means that for the tax year 2016-17 HMRC will not require notification from trustees or personal representatives dealing with estates in administration where the only source of income is savings interest and the tax liability is below £100. Further details will be publicised and communicated with stakeholders through HMRC’s usual communication channels.
The cost to HMRC of implementing these changes is currently estimated to be in the region of £1 million. This includes costs associated with changes to PAYE codes and increased customer contact.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review by HMRC through general compliance work as well as communication with representatives of the savings industry and customers.
If you have any questions about these changes, please contact Helen Williams on Telephone: 03000 512 336 or email: firstname.lastname@example.org.