Budget 2015: tax-free savings allowance launched
The first £1,000 of interest earned on savings will be completely tax-free for lower earners from next year, Chancellor George Osborne has announced.
In a move to appeal to savers who have suffered from historic low interest rates in recent years, the new allowance, which will come into force from April 2016, is expected to take 95% of all taxpayers out of savings tax altogether.
Basic-rate taxpayers will be eligible for the full £1,000, while higher-rate taxpayers – those who earn between £42,701 and £150,000 – will qualify for a £500 allowance.
A saver would need to have £50,000 in an account paying 2% to generate interest of £1,000 (gross) a year.
Announcing the news during his Commons Budget speech, Osborne said: "People have already paid tax once on their money when they earn it. They shouldn't have to pay tax a second time when they save it."
Paul Whitlock, director of savings at Charter Savings Bank, said: "It's fantastic to hear tax has been slashed from savings for up to 17 million people in today's Budget.
"The news is especially sweet for those on lower incomes, and pensioners, who look set to benefit the most. Overall the announcement should help encourage people to save more."
However, Whitlock added that historically low interest rates continue to have a major impact on some people's incomes and the new savings personal allowance would not help them in the long-term.
"While the Chancellor's cut in tax on savings can be seen as a short term crowd pleaser, only long term changes to interest rates will truly shape up our nation's savings culture," he explained. "As it stands, consumers are still not receiving the returns they crave on their cash, especially from the big six who continue to offer poor returns for their customers.
"Osborne's heart is in the right place when he says he wants to build the economy on savings, but in reality this can't happen until interest rates rise."
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.