What does it mean for you, and does it impact ISAs?

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Whether you're a seasoned saver, or just starting your wealth-building journey, understanding the nuances of the Personal Savings Allowance (PSA) is key to a tax-efficient savings strategy.

Here’s why.

The PSA is a core component of the UK's tax landscape, offering individuals a tax-free threshold on the interest earned from their savings. For basic rate taxpayers, this currently stands at £1,000, while for higher earners it’s £500. 

Introduced on 6 April 2016, when interest rates were much lower than they are today, the PSA meant that the vast majority of UK savers didn’t have to think about paying tax on their savings income. This is, however, no longer the case.

We are currently in a period marked by high interest rates. As a result, people are earning more interest on their savings, and could therefore find themselves approaching — or exceeding — their PSA limits more quickly than before. 

And this is where ISAs enter the picture. Your PSA represents the yearly interest you can earn across all of your non-ISA bank accounts without facing tax. ISAs stand out in the financial landscape for a host of reasons, a key one being that they aren’t affected by the PSA. During periods of high interest, this can make ISAs invaluable wealth-building tools.

With an annual ISA allowance of £20,000 per tax year, individuals can leverage ISAs to shield their wealth from tax burdens, and avoid the hassle of tax reporting. 

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Your trusty tax shield

The benefits of utilising your annual ISA allowance

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Everyone has an annual ISA allowance of £20,000, and everyone should consider leveraging this allowance to its fullest for optimal tax efficiency and to maximise their long-term savings goals.

Eligible interest generated within an ISA is never taxed, regardless of the amount earned. As a result, they offer a tax-efficient way to grow wealth without the need to consider PSA constraints.

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The countdown is on

Now’s the time to make your ISA work harder

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As the tax year draws to a close, the ISA annual allowance window also begins to shut. To take full advantage, savers should be looking to beat the deadline so as to maximise tax efficiency, and preserve more of their interest. 

ISAs mean you can effectively bypass the limitations of the PSA, with all interest generated remaining entirely tax-free. Leveraging ISAs before the end of the tax year enables all savers to make the most of their allowance, and optimise their long-term financial strategy.

Check out our Cash ISA in-app now.

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Chip does not provide tax advice or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future.