Around 17 million people will see the tax on their savings abolished as part of a package of measures designed to woo pensioners and others who have suffered years of rock-bottom interest rates.
George Osborne also said that as part of his “savings revolution,” first-time buyers would get their own savings account where the government would offer a payment of up to £3,000 towards a home deposit.
Britain’s savers were among the major beneficiaries of the budget, with a new “personal savings allowance” for all basic and higher-rate taxpayers proving to be one of the few surprise measures. The chancellor said this would take 95% of taxpayers out of savings tax altogether, declaring: “At a stroke we create tax-free banking for almost the entire population.”
There are currently a handful of savings products, such as cash Isas, where people do not pay tax, but with most other savings accounts the interest is automatically taxed at 20% before it is paid.
However, the chancellor said that from April 2016 the government would be introducing a tax-free allowance of £1,000 for basic-rate taxpayers – or £500 for higher-rate taxpayers – on the interest that people earn on their savings. To be eligible for the £1,000 allowance, an individual’s taxable income needs to be less than £42,700 a year. Those on between £42,701 and £150,000 a year will be entitled to the £500 allowance, while the estimated 300,000-plus individuals earning more than £150,000 a year will not receive the tax break.
Under the new regime, a basic-rate taxpayer would be able to save around £70,000 in a top-paying easy access account before any of their interest was subject to tax, while the equivalent figure for higher-rate taxpayers was around £35,000, according to comparison website MoneySuperMarket.
As an example of how it might work, someone who earns £20,000 a year and also received £250 in savings interest will not have to pay tax on the latter sum as it is well within their £1,000 savings allowance.
Someone on £60,000 a year, with fairly substantial savings – enough to generate £1,100 in interest – will also benefit from the new regime. As a higher-rate taxpayer, he or she will not have to pay tax on the first £500 of their interest, but will still need to pay tax on the £600 interest they have earned above their £500 allowance.
As part of the changes, banks and building societies will, from April 2016, stop automatically taking 20% in income tax from the interest earned on non-Isa savings.
Some commentators said the new personal savings allowance risked leaving cash Isas looking a little redundant: a criticism the chancellor appears to have attempted to neutralise by announcing he was making the popular tax-free accounts “radically more flexible”. From this autumn, savers will be able to dip in and out of their Isas much more easily, said the Treasury. Savers will be able to withdraw and replace money from their cash Isa during the same tax year, without it counting towards their annual Isa subscription limit.
From next month, people will be able to put up to £15,240 into an Isa, but the chancellor said that if someone takes that money out, “you lose your tax-free entitlement and so can’t put it back in”. He added: “With the fully flexible Isa, people will have complete freedom to take money out and put it back in later in the year, without losing any of their tax-free entitlement.”
Government documents reveal that the new savings allowance and Isa flexibility are expected to cost the Treasury a total of £3bn between now and early 2020.
Meanwhile, the new help-to-buy Isa for first-time buyers will provide a government cash bonus to those who sign up for the scheme in order to save up for a deposit on a house. For every £200 a buyer saves, the government will top it up with £50. The maximum amount that can be put into the Isa and boosted is £12,000, with the government’s payment topping this up to £15,000.
Many experts praised the changes, particularly the new allowance. Sylvia Waycot at financial data provider Moneyfacts said it had been a “great budget” for savers after years of having been “left out in the cold”.
But not everyone was convinced. Maike Currie, associate investment director at Fidelity Personal Investing, said that while removing the income tax on interest earned on cash “makes for a great headline”, it would do little for cash savers who had to contend with paltry rates. Alex Henderson, a tax partner at PricewaterhouseCoopers, said the allowance puts the compliance onus on to taxpayers: “If you become a higher-rate taxpayer, it’s your responsibility to pay the additional tax due, and this has become more complicated. People who wouldn’t dream of not paying all their tax could be caught out.”
