Finance Bill 2016: personal savings allowance

Briefing for MPs on clause 4

The Tax Faculty has submitted ICAEW REP 102/16, a briefing for MPs ahead of the Public Bill Committee on clause 4: savings allowance and savings nil rate.

​From 6 April 2016 the majority of interest received (namely bank and building society interest) will no longer be taxed at source and a new nil rate of tax will apply to savings income falling within an individual’s personal savings allowance. The personal savings allowance is based on the individual’s adjusted net income, as defined in s58, Income Tax Act 2007 (ITA 2007). The personal savings allowance is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and £nil for additional rate taxpayers.  

​In our briefing we raised the following concerns: 

  • The personal savings allowance is determined based on an individual’s adjusted net income, and as the allowance reduces it creates a ‘cliff edge’ effect with a very high marginal rate. For example, a basic rate tax payer who receives £1 of additional income so that they become a higher rate taxpayer will lose £500 of the personal savings allowance. So £1 of income could result in a tax charge of £100, a tax rate of 10,000%.

  • The measures introduced are likely to bring individuals into self assessment who would have previously have been taxed at source. This increases the risk of non-compliance by those who cannot afford to seek professional help and will also impose compliance costs on taxpayers where none exist presently.

  • The allocation of the personal allowance to different sources of income will now become more important, as the availability of the starting rate band and personal savings allowance should be taken into consideration. 

We have suggested that a comprehensive review of HMRC and private software is carried out to ensure it is able to allocate the personal allowance automatically in the most tax-efficient way.