Around 17 million people will pay no tax on their savings from next spring, while Isas are to be made more flexible, the chancellor has announced.
Britain’s savers, who have suffered years of paltry interest rates, were among the major beneficiaries of the budget, with George Osborne unveiling a new “personal savings allowance” that would, he said, take 95% of taxpayers out of savings tax altogether.
There are currently certain savings products such as cash Isas and some National Savings and Investments issues where people do not pay tax, but with most other savings accounts, the interest is automatically taxed at 20% before it is paid.
However, Osborne said that from April 2016, the government is introducing a tax-free allowance of £1,000 – or £500 for higher-rate taxpayers – on the interest that people earn on their savings. To be eligible for the £1,000 personal savings allowance, an individual’s taxable income needs to be less than £42,700 a year. To be eligible for the £500 allowance, their taxable income needs to be between £42,701 and £150,000 a year.
As an example of how it might work, someone who earns £20,000 a year plus £250 in savings interest will not have to pay tax on the latter sum as it is within their £1,000 savings allowance. Someone earning £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 interest but will still need to pay tax on the remaining £600.
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.
“At a stroke we create tax-free banking for almost the entire population,” declared the chancellor.
SavingsChampion.co.uk said that to earn more than £1,000 savings interest, a basic-rate taxpayer would currently need to have more than £71,400 in a best-buy easy access account earning 1.4%.
Osborne also said he was making the existing tax-free Isas “radically more flexible”. From autumn 2015, 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 April 2015 savers will be able to put up to £15,240 into an Isa, but the chancellor said that if someone takes that money out, they lose their tax-free entitlement and so cannot 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 these two measures are expected to cost the Treasury almost £3bn between now and the spring of 2020.
