The £1,000 tax allowance was meant to be simple. However some people are missing out because the new system wasn’t clear on what products the banks offer are tax-free.
Many people were looking forward to receiving a little extra money thanks to the government scrapping the 20% tax charge that was levied on cash accounts. It was set to allow basic-rate taxpayers to earn up to £1,000 a year from various sources, such as bank and building society accounts, bonds and National Savings & Investments without paying any tax. Higher-rate tax payers can receive up to £500 tax free. However the problem is that current account providers define payment’s differently, which means that some count towards the personal savings allowance and others won’t be affected by the new changes.
For example the Co-operative bank pays £4 a month to current account customers who sign up to its Everyday Rewards scheme, but this is paid net of 20% tax. The actual reward is £5 but £1 goes straight to the taxman. As it is classed as an annual payment for tax purposes, customers will continue to receive £4 even with the start of the new changes, as an annual payment must have tax deducted at the source.
Barclays Bank offers a scheme called Blue Rewards where you pay Barclays £3 a month in fees and offer you £7 a month reward. This is paid in full without the 20% tax deduction as it is classed as miscellaneous income by HMRC which means that it is taxable and has to be declared on tax returns. But it doesn’t count towards your Personal Saving Allowance of £1,000.
Current account providers such as Lloyds, Santander and Nationwide define the interest paid on their accounts as savings income, so they stopped the automatic 20% tax deduction on April 6th 2016. So customers holding these accounts should already have seen an increase in their monthly income.
HMRC stated that “Financial institutions sometimes offer benefits or rewards to account holders where they meet particular conditions, such benefits are generally paid as an incentive to open and maintain an account with the institution rather than as a return on the amounts deposited in it. They are therefore not interest, or any other kind of saving income, and will not be covered by the personal savings allowance.”
If you have any concerns check with your bank or building society to ask about your particular account, or contact us for further advice.
Information Provided by the Sunday Times: the Times & the Sunday Times
Picture from: Engineer Your Finances