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On 6 April 2016 a new allowance - the Savings Allowance - was introduced into our tax system. The Savings Allowance applies a new 0% rate for up to £1,000 of interest receipts for a basic rate taxpayer and up to £500 for a higher rate taxpayer.
A consequential change to the machinery of tax deduction by the entity paying the interest has been made. The introduction of the Savings Allowance will mean that the majority of taxpayers will not pay tax on their interest. The government has therefore removed the requirement (from 6 April 2016) for banks and building societies to deduct tax from account interest they pay to customers.
However, in 2016/17 basic rate tax will still be deducted at source from some forms of savings income such as interest distributions from unit trusts and OEICs. The government proposes to remove this requirement from April 2017.
Of course if your interest income exceeds the Savings Allowance, there will be extra tax to pay and if you are a higher rate taxpayer, you are more likely to be in this position as the Savings Allowance is only £500.
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