Page 6 - Budget Newsletter - March 2023

‘Savings income’ in this instance is primarily interest, but also includes gains made on investment
bonds, including offshore bonds. Although called an allowance, the reality is that the PSA is a nil
rate tax band, so it is not quite as generous as it seems. The PSA means that banks, building
societies, National Savings & Investments (NS&I) and UK-based fixed interest collective funds all pay
interest without any tax deducted, but they do report payments to HMRC. Thus, if your interest
income exceeds your PSA –you could have tax to pay.

Exceeding the PSA limits used to require a substantial amount of capital, but as interest rates have
risen, the picture has changed. For example, if you are a higher rate taxpayer with an instant access
account paying 3%, then £16,700 is enough to generate annual interest above your PSA. Be warned
that if you do not tell HMRC, it will have the data to tell you.

If you and your spouse/civil partner receive substantial interest income, it is worth checking that
you both maximise the benefit of the PSA. It is also wise to review what interest rates you are
currently receiving. As the Treasury Select Committee recently noted, many banks have been
distinctly reluctant to pass on the benefit of the ten increases in interest rates (totalling 3.9%) that
have come from the Bank of England since December 2021.

The dividend allowance

The dividend allowance also started life in April 2016, originally at a level of £5,000 before it was
reduced to the current £2,000 in April 2018. The Autumn Statement 2022 announced two further
cuts: to £1,000 in 2023/24 and then to just £500 from 2024/25.

The allowance means that, in 2023/24, the first £1,000 of dividends you receive is not subject to any
tax in your hands, regardless of your marginal income tax rate. Once the £1,000 allowance is
exceeded, there is a tax charge, the rate of which increased by 1.25% for 2022/23 (and was not
abandoned when the 1.25% Health and Social Care Levy was scrapped). Like the PSA, the dividend
allowance is really a nil rate band, so up to £2,000 (2022/23) of dividends do not disappear from your
tax calculations, even though they are taxed at 0%.

Dividend tax rates

Tax year Basic rate Higher rate Additional rate
2022/23 onwards 8.75% 33.75% 39.35%

The historic yield on UK shares is currently around 3.7% which means, in theory, a UK share portfolio
worth more than about £27,000 could attract tax on dividend income in 2023/24, even for a basic
rate taxpayer. In 2024/25, that figure will halve.

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