Under the Personal Savings Allowance (PSA), from April 6, many savers will be able to get a nice little sum of up to £1,00 tax-free interest on their savings.

Unfortunately, 90% of savers aren't sure what the new allowance will be, AA Financial Services figures revealed. 

Even after the Personal Savings Allowance was explained, almost half (49%) said that they didn’t know what to do with their money in the new financial year, with the key differences between savings accounts and ISAs causing the most confusion.

There is a willingness to save, with 23% of people expecting it to be easier over the next few months.

It’s not just savers either: banks are failing to tell customers about the new allowance and in some instances are providing incorrect information. HMRC seems to be short on details as well.

So, here’s what we know about the upcoming Personal Savings Allowance.

What accounts will be covered

The Government has said that an estimated 95% of savers won’t pay tax on their savings.

All savers aside from additional-rate taxpayers will have a tax-free personal allowance. It’ll be £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Current accounts, fixed-rate bonds and regular savers, NS&I investments, credit unions, Peer-to-Peer platforms, corporate bonds and government bonds are covered by the PSA.

Be warned that savings within the PSA can push you into a higher Income Tax band. Add your income from work and from savings interest together to calculate the total sum. If that puts you into the higher rate of £43,000 then you’re a higher rate tax payer and you get the loer £500 Personal Savings Allowance.

If you’re on a joint account with one basic rate and one higher rate taxpayer you’ll both receive your respective allowances which you will each use against your share of the interest.

There will be no tax to pay at all if your total taxable income is under £17,000.

Where you should put your money?

You’ve got a few options when it comes to where you put your funds. We’ll tell you what you need to know about each one.

Savings accounts

It’ll come as no surprise that savings rates are still poor.

Those who want to stick with savings accounts should stick stick with a longer term fixed rate bond. Generally speaking, the longer the term, the better the interest rate. 

Here are the best fixed rate bonds ranging from 18 months to seven years.

Account

AER

Term

Minimum deposit

Access

Al Rayan Bank 2.17%* 18 months £1,000 Online, branch, post, phone
Al Rayan Bank 2.78* Two years £1,000 Online, branch, post, phone
Al Rayan Bank 2.88% Three years £1,000 Online, branch, post, phone

Union Bank

2.55% Four years £10,000 Post

Milestone Savings

3.20%*

Five years

£10,000

Online

FirstSave

3%

Seven years

£1,000

Online

*Expected profit rate

If you do want an easy access account, go for RCI Bank’s offering. It’s got 1.55% AER for a minimum investment of £100.

Account

AER

Minimum deposit

Access

RCI Bank

1.55%

£100

Online

ICICI Bank

1.40%

£1

Branch

Virgin Money

1.31%

£1

Online

Shawbrook Bank

1.30%

£1,000

Online

National Counties Building Society

1.26%

£500

Branch

NS&I

1.26%

£500

Online, post, phone

Melton Mowbray Building Society

1.26%

£1,000

Online

[Related story: How new savings rules could make you a lot richer]

Peer-to-Peer

You can lend through Peer-to-Peer platforms for one month, one year, 18 months, three years, five years or seven years.

They offer cracking returns too. For example, Lending Works gives investors the chance to lend for five years with a whopping 6.2% return. That’s almost double Milestone Savings' offering.

Current accounts

Savers with a small to medium-sized pot could benefit from a high-interest current account, covering balances from £2,000 to £20,000.

The TSB Classic Plus Account gives you 5% interest on balances up to £2,000 while the Nationwide FlexDirect Account will give you the same 5% on balances up to £2,500 for your first year. The Tesco Bank Current Account offers 3% on balances of up to £3,000 while the Club Lloyds Current Account gives 4% on pots between £4,000 and £5,000.  

If you know you definitely won’t go over the Personal Savings Allowance limit then go with the Santander 123 Current Account which gives you 3% interest on balances between £3,000 and £20,000.

National Savings and Investments

National Savings and Investments (NS&I) products are all backed by the Treasury and are 100% secure.

Find out more about its Income Bond, Investment Account, Direct Saver and more by visiting the NS&I website.

Corporate and Government bonds (gilts)

Corporate bonds, as its name suggests, are issued by companies. In the past few years companies have been offering bonds which are aimed at ordinary people, like Tesco and Hotel Chocolat.

They are excluded under the Financial Services Compensation Scheme (FSCS), so if the company goes bust, you’re stuffed.

Governments issue bonds to raise money, and in the UK they’re known as gilts. They can be conventional bonds (with fixed income payments) or index-linked bonds whose payments change according to inflation.

You can buy them when the government first issue them or from other investors on the markets. The price is driven by several factors, including risk. UK and US bonds are considered to be safer so they’re understandably more expensive.

Go to the Debt Management Office to see where you can buy gilts.

[Related story: How to earn £28,000 a year tax free]

Paying the right amount of tax

HMRC has said that it will ‘normally’ collect tax by changing your tax code and tax that is due on bank and building society interest will collected through PAYE.

There are concerns that the tax information provided to HMRC by the banks could be out of date, particularly for those with varying balances like homeowners who have downsized.

Pensioners are also more likely to have several sources of income like a work pension, state pension and part-time job as well as interest.

You might need to contact HMRC to correct your tax code. Ring 0300 200 3300 or fill out its 2016/17 tax code query form.

Get a better return on your money by lending it out through a peer-to-peer site