The Personal Savings Allowance (PSA) comes into force from the start of the 2016/17 tax year and will reduce the amount of tax paid on savings interest for most people.

It is a radical new government scheme designed to encourage people to save more, it is conscious that it needs to incentivise savers at a time when interest rates are historically very low.

Up until the introduction of the PSA all bank and building society interest was paid net – i.e. after 20% has been deducted at source by your account provider (apart from ISAs).

The tax treatment of savings interest changes from 6^th April 2016 when everybody will receive their interest payments gross – i.e. without any tax deductions.

The PSA applies to interest earned on all non-ISA cash savings ,current accounts and Peer to Peer lending and will allow savers to receive a generous portion of their interest totally free of tax.

As a result of this move it’s expected that around 95 per cent of savers will receive their interest tax free – a change that gives the vast majority of savers an instant boost of 20% on their savings income.

The amount of tax free interest you will be entitled to under PSA will be based on your annual taxable income as follows:

• If you earn less than £43,000, i.e. a basic rate taxpayer, there will be no tax payable on the first £1,000 of savings interest earned each year.
• The tax free allowance if you are the higher rate tax bracket (earning between £43,001 and £150,000) has been set at reduced limit of £500.
• People in the 45% tax band, i.e. those with an income above £150,001 are currently not entitled to the PSA.

It’s a positive move that will see lower earners benefit from the largest allowance giving a welcome but long overdue instant boost to UK savers.