A positive year ahead for savvy savers
Now, come on, who doesn’t want to protect more of their money from tax? I certainly do. Come spring time, tax on savings interest will become the exception rather than the norm as a result of changes announced in the government’s March 2015 Budget.
Too right too, I say, given the fact that most savings are squirrelled away from take-home income that has already been taxed. A tax on savings is a form of double taxation.
So from the start of the new tax year on 6 April, all bar additional-rate taxpayers (those earning at least £150,000 and paying 45% tax) will be able to generate at least £500 of annual interest from their savings without troubling the taxman.
For basic-rate taxpayers – those with taxable income of less than £42,700 a year – the tax-free personal savings allowance will be higher at £1,000. Furthermore, banks and building societies will stop automatically taking 20% in income tax from the interest you receive on your deposits.
These welcome changes are being made without impacting on tax-free cash individual savings accounts (Isas).
Savers will continue to be able to put a maximum of £15,240 (both in the 12 months to 5 April 2016 and the 12 months from 6 April) into cash Isas with interest tax-free.
Indeed, for most savers, cash Isas should remain their first port of call (rather than relying on their new personal savings allowance).This is because the cash Isa is a guaranteed tax-free shelter, so savings can build and be protected from the taxman year after year. It is also a fact of savings life that the best savings rates (provided you are prepared to chase them) are available from cash Isas.
For cash Isa savers, 2016 brings a new treat. In the autumn their savings plans will become more flexible, allowing them to make temporary cash withdrawals and subsequent deposits without losing their tax-free entitlement.
But savers will not have it all their own way. Of course, most savers will be praying for an uptick in interest rates as 2016 progresses.Yet the uptick is far from guaranteed. Some economists believe it might be as late as 2017 before the Bank of England signals an increase in Base Rate from its current level of 0.5%. Even then, savings rates might not increase by as much, if at all.
This year will also bring yet another reduction in what can be saved inside a pension before further taxes (as high as 55%) are applied.This falls in April from £1.25 million to £1 million. Also, additional-rate taxpayers will see their ability to fund pensions compromised by the progressive withdrawal of their annual contribution allowance. In some cases, it could fall to £10,000.
Anyone who believes they will be affected by these changes should seek financial advice urgently (visit Unbiased.co.uk for a list of independent financial advisers in your area).
In 2016, we will see the launch of the new state pension, promising around £155.65 a week for those reaching state pension age after 5 April. Not everyone will benefit (far from it). For more details, take a look at our feature here, as well as Gov.uk/new-state-pension/overview.
Even if your entitlement to a state pension is a little distance off, it is worth looking at what you are on course to receive. Have a gander at Gov.uk/calculate-state-pension.
What else? Those mortgage borrowers who have yet to do so should lock into a fixed-rate mortgage – three or five years. Also, ensure you are getting best value for your home and motor insurance, and your gas and electricity supply – and don’t be frightened to switch bank accounts if your current provider isn’t giving you the service you deserve.
Finally, if you have a spare room in your house, the tax- free amount you can earn from it rises in April from £4,250 to £7,500. Certainly worth a thought.
All that remains for me to say is to wish you a truly brilliant personal finance year in 2016. Fingers crossed.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.