From next year, if you are a taxpayer, you will be able to get a better return on your savings. George Osborne announced in this week’s budget that a new personal savings allowance will be introduced in April 2016. Some commentators have suggested that the new allowance will mean that 95% of people will no longer have to pay tax on their savings interest.
The proposed plans
Currently, the interest accumulated on a standard savings account is taxed by 20% for basic rate taxpayers. But from April 2016, banks and building societies will no longer be able to do this.
Instead, the personal savings allowance proposed will mean that basic rate taxpayers will not have to pay tax if the interest that they earn on their savings is less than £1,000 p.a. So, if you are paid £20,000 a year but have a savings tucked away that earn £250 a year in interest, then as of April next year you won’t have to pay any tax on that interest. Not paying tax on the interest that you earn (up to £1,000 a year) makes it all the more worthwhile building up a nest egg.
To be eligible for this, you have to earn less than £42,700 a year. People that earn higher than this (between £42,701 and £150,000) will be classed as higher rate taxpayers and will only receive a £500 tax-free savings allowance.
What could this mean for you?
This tax free savings allowance will most likely mean tax-free savings income for the majority of the population, as most of us don’t have enough saved up to earn more than £1000 in interest. For example, if you could find a savings account paying you 5% a year (and most pay far less than this at the moment), you would need £20,000 saved up to get to the £1,000 a year interest limit.
As the plans won’t come in until April 2016, you’ll have plenty of time to start saving now ready to take advantage of this new initiative.
These plans are not the only ones announced in the Budget that will help your money to go further, so, to read about the Help to Buy ISA scheme click here.