Personal Savings Allowance for Limited Company Contractors

Personal Savings Allowance

One of the major changes introduced on the 6th of April this year was the new Personal Savings Allowance (PSA), which will see almost 95% of all taxpayers no longer having to pay tax on their savings income (such as interest).

So how does this affect Limited Company contractors? In this blog, Director of Operations, Laura Hepworth from Intouch Accounting explores what you need to know and how to make the most from the new PSA.

What is the Personal Savings Allowance?

Originally introduced by the Government in order to reduce the amount of tax paid on people’s personal income, the PSA means that any savings earned from banks, NS&I products company bonds or building societies will not be taxed up to a certain limit. This is, however, depending on whether you’re a basic, higher or additional rate taxpayer:

 

How did it previously work?

 

How does it now work?

Building societies and banks no longer take the flat rate income tax (20%) from the interest earned, rather they pay you gross and the interest details are reported directly to HMRC.

PAYE codes have become more trustworthy, as HMRC believe this new method will allow tax codes to be identified by the amount of savings income they have earned in previous years.

It’s not all good news though, as those who do not receive an income but do generate a savings income will have to complete and submit a tax return. But for contractors, their tax code will automatically be adjusted to include tax free savings.

What happens if you exceed your PSA?

HMRC will deduct any tax owed from your take home pay, as your PAYE tax code will be automatically adjusted.

If you are aware that you have exceeded your PSA limit you can let HMRC know at any point, rather than waiting for them to adjust your tax code.

Is the £5,000 dividend allowance or existing ISAs affected by the PSA?

As the dividend allowance is separate and existing ISAs are tax-free, neither are affected.

What happens to joint accounts?

Both parties involved in a joint account will receive separate PSAs. Therefore if one is a basic rate taxpayer and the other is a higher rate taxpayer, then jointly you will receive a PSA of £1,000 and £500.

What about multiple accounts?

HMRC will cross-reference all of your accounts to understand your tax code and calculate the amount of tax due.

Do monthly reward / cashback schemes affect PSAs?

The PSA includes interest and savings income, but not all building societies and banks are considered as ‘savings income’. For example, if you were to receive a monthly cash reward (such as a bonus for your loyalty to a certain bank provider) this is classed as ‘annual payments’ and therefore are not covered by PSA. So this means that HMRC considers annual payments to be subject to tax.

If you are not a taxpayer, you can claim the tax back by using an R40 form and returning it to HMRC.

 

How is interest paid on PPI and other compensation payments treated?

Tax is still taken from any compensation interest paid, as it’s not part of PSA. Whilst this is the case, the tax could still be claimed back by completing an R40 form.

In conclusion

If you’re confused by PSAs or have questions about how it affects you and your personal circumstances, it’s always best to consult with an expert. Our team of specialist contractor accountants are available to do just that, whenever you need them.

Get the best and the most from your career in contracting. Speak to our team today on how our tailored, specialist advice can help you achieve contracting success.

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