The personal savings allowance

The personal savings allowance

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Hi

I am trying to get my head around the new 'personal savings allowance' (PSA) and I am currently stuck on the point of how the allowance might affect the tax charge on other savings and dividend income.

The Revenue guidance suggests that the PSA entitles taxpayers to tax-free income of up to £1,000.  What it is not clear on is whether this is effected by reducing taxable income by £1,000/£500 or whether it effectively taxes the income at 0%.  I think this will make a difference to the remaining basic rate band for savings income in excess of the allowance and for divided income.

For example, a taxpayer with employment income of £41,000 and interest of £6,000.  Do they have £30,000 of employment income taxed at 20% (£41,000 less PA), £500 of savings income covered by the PSA, £2,000 of savings income at 20%, £3,500 at 40%;

or £30,000 employment income at 20%, £500 savings income at 0%, £1,500 at 20% and £4,000 at 40%?

I have read the Finance Bill and I think it suggests the later approach is correct?

Would be grateful if any members could confirm or correct?!?!

Replies (2)

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By Duggimon
20th Apr 2016 12:42

It's a nil rate band and doesn't reduce income.

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By Cupid Stunt
20th Apr 2016 18:22

Yes, it is definitely an allowance.

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