New Tax Free Savings Allowance, How Does It Work?

Q. I have heard that the government have introduced a new non-taxable allowance for savers in cash deposit accounts.

As we have large cash savings how will this help us?

A. This was announced a year in advance last March, and takes effect this April.

At the moment savings are taxed at either 20% or 40% depending on your rate of income tax.

From April 2016 basic rate tax payers will be able to earn £1,000 pa interest in a savings account before being taxed. Higher rate tax payers will be allowed £500 pa.

This means that a basic rate tax payer can have around £70,000 in savings before being taxed and half this for a higher rate tax payer.

You will pay no interest at source, but if you earn more interest than your tax-free allowance, it is up to you to declare this to HMRC.

It’s estimated that these changes will take 95% of savers out of deposit account tax!

With interest rates very low and likely to remain so, then any help here is welcome.

The savings are not huge.  But if a couple had £105k in savings, and one was a basic and one a higher rate tax payer earning 1.5% pa Interest, then they would jointly save £420 pa.

You will also need to compare the cash ISA situation to see which are your best options.

But some good news for once!