Tax-free investing outside of an ISA

Last week, to little fanfare, an important allowance came into effect, taking millions of savers and investors out of paying tax on interest they earn.

The Personal Savings Allowance (PSA) allows people to earn interest tax-free, whether that interest is paid by a bank, building society or marketplace lending platform such as RateSetter.

Basic rate taxpayers (those whose income is taxed at 20%) can earn £1,000 in tax-free interest, while higher rate taxpayers (those who pay income tax at 40%) will receive a £500 allowance. Additional rate taxpayers (those taxed at a rate of 45%) will not receive an allowance.

The Government claims that 95% of people will not pay tax on the first £1,000 or £500 of interest they receive. When he announced the PSA, the Chancellor said:

“People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it”.

This change is separate to the Innovative Finance ISA and does not affect the ISA allowance, meaning when RateSetter’s IF ISA launches, investors will be able to hold funds tax-free in an IFISA and also earn tax-free interest within the PSA.

The table below demonstrates how much can be saved or invested under the PSA rules before income tax is due:

*Unweighted average of rates available from April 2015-March 2016

The great news is that tax-free investing via the PSA doesn’t affect your ISA allowance, when the RateSetter IF ISA launches, you’ll be able to use both products separately and benefit from two separate tax breaks.