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Sunday, 22 March 2015

SAVINGS REVOLUTION

The major savings revolution in George Osborne's final Budget of this Parliament was a promise to scrap the automatic deduction of tax on interest earned on savings from April 2016.

At the moment banks and building societies take 20% off our interest and pass it straight to the Treasury. In 2013/14 that raised £1.8 billion. But a chunk of that tax is taken from interest earned by non-taxpayers. They have to go through a complex two-form process to claim it back and then stop it being deducted in future. Many do not do that and Her Majesty's Revenue & Customs has estimated that £200m a year is taken from them and never reclaimed. From April 2016 all that will end. Interest will be paid gross without tax deducted for everyone.

The new rule will apply to any interest earned on money in savings or current accounts including fixed rate savings bonds and the 65+ National Savings Guaranteed Growth Bond. Any payment that arises in 2016/17 or later will be paid without tax being deducted.

The rule was changed because 95% of people will no longer pay tax on the interest their savings earn thanks to a new savings tax allowance which begins at the same time. For basic rate taxpayers the first £1000 of interest on savings will be free of tax from 6 April 2016. The maximum tax saving will therefore be £200. 

That saving will only be achieved by those with high five figure sums earning interest. For example £71,400 in the top instant access account paying 1.4%. Or £192,300 in the average which pays just 0.52%. A three year fixed term bond paying an average 1.94% would need £51,500 to earn £1000. So it is only those with considerable savings who will benefit to the maximum. 

For the five million (one in six) taxpayers who pay higher rate tax the allowance will be only £500 so they will hit the maximum saving with half those amounts. Those paying the top rate of 45% tax will not be given the allowance.

All other savers will gain - though often not much. Someone with £5000 in a savings account paying 1% will save a tenner a year. But if you saw a ten pound note on the floor would you bother to bend down and pick it up? Of course you would. And ending the hassle of claiming back wrongly deducted tax will help hundreds of thousands of people. Tax breaks always benefit the better off the most. But everyone with savings will get see some gain from these changes. 

The allowance is per person so a couple gets one each and the rules leave the way open for couples with unequal incomes to maximise their tax saving by moving money from one to the other, as they can now if one pays no tax. 

Anyone with savings which earn interest which totals more than £1000 (or £500 for a higher rate taxpayer) will have to pay tax on the excess. That will be collected through PAYE from 2017 or self-assessment. Those not in either system should contact the Revenue in 2016/17 to find out how to pay.

The allowance applies to any interest earned in a bank or building society so the interest paid on current accounts will be paid gross and count towards the £1000 total. It makes the Santander 1-2-3 account which pays 3% on up to £20,000 and the 5% paid on some balances by Nationwide and TSB seem even more attractive. 

The new regime will also apply to the 65 plus Guaranteed Growth Bond from National Savings & Investments and any interest arising after 5 April 2016 will be paid gross, though NS&I has yet to set out the full details. It will still be taxable in the year it arises and the interest on the three year bond will have to be paid each year by all taxpayers, including those on basic rate due to pay tax.

The savings tax allowance begins in 2016/17 and is separate from the new £5000 savings tax band which begins in 2015/16 where the interest is taxed at 0% for those with incomes below £15,600. That band is explained in my Taxfree Savings blogpost.

22 March 2015
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