Budget 2015: tax-free savings allowance launched

Published by Rob Goodman on 18 March 2015.
Last updated on 19 March 2015

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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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