There are some big changes happening to personal finances set for this new financial year.
The most exciting of these is the Personal Savings Allowance. It sets out to make saving more rewarding, by cutting the tax due on savings interest. Most people will find they pay no tax at all on the interest their money earns in a traditional savings account.
What is my personal savings tax allowance?
Many people simply don’t realise that the taxman helps himself to a slice of the interest in their bank or building society savings accounts – because the tax is deducted at source by the provider before it ever reaches their account.
Currently basic-rate taxpayers pay £20 for every £100 interest they earned, while higher rate taxpayers hand over £40.
Under the new allowance, basic rate tax payers will be able to earn £1,000 interest on their savings, tax free. Higher rate tax payers will receive a £500 allowance although additional rate (45%) taxpayers will not receive any allowance at all.
The scheme should see 95% of savers no longer paying any tax on their savings income.
Saving looks more rewarding
This sounds exciting if you have a cash lump sum a savings account. But it’s not just bank savings accounts that look more rewarding. Credit union accounts, building societies, corporate bonds, government bonds and gilts are all covered. This includes interest earned on other currencies held in UK-based savings accounts.
Interest from peer-to-peer lending and unit trusts, open-ended investment companies, investment trusts and most types of purchased life annuity payments are also covered.
Remember though, this new concession only covers interest on savings. Dividend income from shares or funds is not covered – and new rules mean you may find yourself paying more tax on that.
Are ISAs affected?
Interest that is already tax-free isn’t included – so ISA Interest will still be paid tax-free, and won’t count toward your limit. So, if you get £500 in ISA interest, and you’re a basic-rate taxpayer, you’ll still have £1,000 to cover interest from other savings.
Many savers found low interest rates meant Cash ISAs had little to offer even before the budget. With adjustment for inflation, savers who used their full Cash ISA allowance each year for the past 15 years have actually seen the value of their money fall in real terms.
But remember, your ISA protects your savings from interest permanently. If you’re a higher rate payer putting £15,000 a year into an ordinary savings account paying 1%, it would take you around three years to reach the point (£50,000) where you will earn £1000 in annual interest. But after that, you will find yourself paying tax on your interest again. If you had put the money in an ISA offering the same rate, all your returns would be tax free.
Personal savings allowance in a nutshell
- Lower rate tax payers can receive £1,000
- Higher rate tax payers can receive £500 in interest tax free
- Anyone earning more than £150k a year has no personal savings allowance
- Beyond the allowances, lower rate taxpayers pay 20% on savings income, and higher rate taxpayers 40%
How to pay less tax?
The Personal Tax Allowance is good news, and should help you pay less tax. But for a better answer to the question ‘how can I reduce my tax bill?” you need proper financial planning. To discuss the advantages and disadvantages of different savings products, taxation or financial planning generally, contact us today.
Click here to read our recent blog “Increase Your Savings or Pay Your Mortgage off Early?”
The Financial Conduct Authority does not regulate taxation and trust advice.
Levels and bases of reliefs from taxation are subject to change.