A savings tax cut

A new personal savings allowance will come into existence in April 2016. 

“Today I introduce a new Personal Savings Allowance that will take 95% of taxpayers out of savings tax altogether”. So said the Chancellor in his Budget speech. While not inaccurate, there was much behind the announcement which went unmentioned. 

What the Budget paperwork revealed is that from 2016/17 there will be a new Personal Savings Allowance, set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers (if you are an additional rate taxpayer, the allowance will not apply). The measure was not contained in the Finance Act 2015, so will have to be introduced after the election. 

The new allowance applies to savings income, which is primarily interest from deposits and fixed interest securities: it does not cover dividends or rental income. At best, the new allowance will reduce the relative appeal of a cash ISA, which also offers tax-free interest, but generally with more restrictions and less choice than other savings accounts. This may explain why the Chancellor announced a relaxation in the rules for cash ISAs, probably effective from autumn 2015. This will allow cash ISA savers to withdraw and replace money within the same tax year without it counting towards their annual subscription. 

These changes to savings tax mean that a review of how and where you hold cash and investments may well be necessary. For example, there is little point in placing cash rather than investment funds in an ISA if you can receive all your deposit interest tax-free anyway. 

 

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