Budget 2015: tax-free savings allowance launched

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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."

Nigel Keohane, research director at think tank the Social Market Foundation, also has concerns. He said: “The proposal to make income from savings tax free for those earning below the higher-rate tax threshold is eye-catching but the benefits are illusory. A large proportion of the population have no savings (29%). At a household level, for those that do have savings, the average in non-Isa savings accounts is £4,000. If this amount was saved in a typical instant access account, the new tax allowance would save someone less than £5 a year.”
He added: “The problem with this reform is not so much that they make Isas entirely redundant, but that they appear to do so. This reform could damage the Isa and the positive effect the product has on savings levels. As recent research from the SMF showed, the Isa wrapper acts as a way of encouraging saving because it is highly visible, widely marketed and because the annual deadline acts as a trigger to encourage saving.”

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How will this work in practice?  Will we receive gross interest on savings from banks/building societies with the onus on individuals to declare any accrued interest in excess of £1000 to the taxman?

Thanks for your question. The Treasury says that from April 2016 banks and building societies will stop automatically taking 20% in income tax from the interest earned on your non-ISA savings. It is yet to set out how individuals with savings interest above the personal allowance will pay tax on the rest. We will update you with the details as they become available.

Does this mean that interest earned via Peer-toPeer lending will also be exempt from tax?

No much sign of any allowance for the hated 10% non-repayable tax credit on equity investments.  I paid as much tax on what I saved into those as I have on any cash savings.  What's the difference?

I would also be interested to know if this applies to peer to peer lending. If it does, it will avoid the need to wrap it in an ISA for the majority of investors.

Who has savings? And who gets more than 0.5-2.0% at most - good idea if interest was good, but it's too little too late!

A number of current accounts are available from Nationwide, TSB, Tesco Bank, Yorkshire Bank, and Royal Bank of Scotland that all have no fees and pay between 2 and 5% interest, normally up to a maximum of £5,000 per account, and without needing to transfer your banking/direct debits to them.  If you have more than £5,000 of savings, open more than 1 account.  You just have to make sure you set up a direct debit to churn £1,000 through all the accounts (or do it manually) and back to where it started as most of these accounts only pay interest if you pay in at least £500-1,000 each month.  But you can pay in and take it straight back out again so you don't need a new £1,000 each month, just your existing pot.
I'm personally earning between 3% and 5% interest on my 'savings' that I hold in these current accounts rather than in savings accounts and will benefit from the new £500 allowance as a result.  Currently these accoutns are paying more than any cash ISA is so I use the ISA for investment funds instead of cash.  Start with Nationwide FlexDirect as that pay 5% on up to £2,500 and open others if you have more to save.
Accounts from ClubLloyds and Santander may have higher limits, but they also come with fees.

And remember that, if you earn year less than £10,600 in the tax starting in a few days time, new rules from last year's budget give you up to £5K of savings interest at 0% tax anyway and you should register with your bank B/S etc for your interest to be paid tax free , form R85, (or reclaim at the end of the year).
Look into the details if you will be earning £10,600 - £15,600 - I'm not going to try to put them here.

Santander 123 fees are easily covered by cashback on household bills and pay 3% on up to £20,000.
Much the best current account if you have significant savings.

I am a non taxpayer and use a Santander current account.  You are correct in saying that there is a fee with this account, but you get money back on direct debit payments to utilities which more than covers the fee and with 3% interest on balances between £3,000 and £20,000, I am more than happy.