Most savers will be given a special personal allowance from April 2016 where savings interest on non-cash ISAs isn't taxed, Chancellor George Osborne announced today.
The new personal allowance will also apply to peer-to-peer (P2P) lending from next April, although details on how exactly this will work are yet to be announced. See our Peer-to-Peer Lending guide for how it works, how it's regulated, what the risks are, and how the different players stack up.
Here is how much interest you will be able to earn before paying tax on savings each year under the new system, depending on the taxpayer you are:
- Basic-rate (20%) taxpayers: £1,000
- Higher-rate (40%) taxpayers: £500
- Top-rate (45%) taxpayers: £0 - they do not get an allowance
Below is a table of how much you'd need in a standard savings account to hit the thresholds (assuming current best buy rates).
|Basic-rate taxpayer||Higher rate||Additional rate|
|Top easy access, 1.4%||£71,450||£35,725||N/A|
|Top 2yr fixed, 2.25%||£44,450||£22,225||N/A|
|Santander 123 current account*, 3%||£20,000 (i)||£16,665||N/A|
From April 2016. Assumes constant balance. (i) Max £20,000 deposit, so basic-rate payers would still have an additional £400 of allowance.
Of course, all interest is tax-free in a cash ISA anyway, so these new limits will be in addition to ISAs, where you can save up to £15,000 in the current tax year, rising to £15,240 in the next tax year (starting on 6 April).
The new rules may diminish the attractiveness of ISAs in some people's eye but that could be the wrong call, as Martin Lewis, MoneySavingExpert.com founder and editor, explains: "This is a very generous allowance while interest rates are low.
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"But if savings rates go up to the 7% interest rate levels we saw before the credit crunch, when it was much easier to rack up larger amounts of interest, then it would look much less generous.
"This is why putting money in an ISA is still important as with an ISA you can build more and more of a stockpile of cash each year, which you may need one day if savings rates rise or the amount you can save rises."
Cash ISA pros
A cash ISA can still win where:
- The rate is similar or better than a standard savings account, as you may as well grab the bigger tax shield it provides.
- You want a fixed-rate savings account, as long as the rate isn't significantly worse, as stricter rules mean an ISA allows you to withdraw cash - not all standard fixed-rate savings do.
- You think you are likely to have a larger pot of savings in future that may take you over the allowance, especially for higher-rate taxpayers who have a smaller allowance.
- You are an additional-rate taxpayer or think you may become one.
Cash ISA cons
A standard savings account can win if:
- The ISA rate is much worse than on a standard savings account.
- You want to invest in a stocks & shares ISA. As the limit for a stocks & shares and cash ISA is a combined £15,000 per tax year, you'd be better maxing the limit with your investment and using a normal savings account for the rest.
The Government is still to confirm exactly how any tax owed above the allowances will be paid, though it is likely to be via the PAYE or the new self-assessment system.
The new savings personal allowance is completely separate from the personal allowance all taxpayers get on their standard income, where most can currently earn £10,000 before any tax is charged, though the Chancellor announced this will rise too over the next few years, which translates into a mini tax cut for most.
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