BASIC RATE BOOST
The first £1,000 of interest will be tax free for basic-rate taxpayers thanks to a new “personal savings allowance”. Someone with a total of £75,000 savings making 1.3 per cent would earn £975 interest a year, which would all be free of tax.
The Government says that 95 per cent of people with savings accounts will pay no tax on the interest because it will be less than the personal savings allowance.
Any interest on an ISA will not count towards the allowance and will continue to be tax-free. The allowance is per person. So if you have a joint account each partner will get their own allowance and the interest will normally be allocated half each.
For higher-rate taxpayers the allowance will be cut to £500. The higher rate threshold is scheduled to start at an income of £43,000 in 2016/17. People with an income over £150,000 will not be entitled to the personal savings allowance.
Because so few people will pay tax on savings interest, the Government is making another big change.
From 6 April the interest paid will not have tax deducted from it by the bank or building society. At the moment they automatically take off 20 per cent basic rate tax and pass it to the Treasury. So if savings earn £10 interest, £2 goes to the Chancellor and you keep £8. But from April interest will be paid to everyone gross, without tax deducted.
Those who have enough savings to earn more interest than the personal savings allowance will have to pay tax on the excess. That will be done either through self-assessment or, for those with a pension or earnings, through a change in the PAYE tax code.
HMRC is already sending out revised codes to people it thinks will have more savings interest than their personal savings allowance. It is estimating how much that might be and adjusting the code accordingly. It is likely to get this calculation wrong, so it will be important to check at the end of the tax year that the amount of tax deducted is correct.
The change will apply to any interest that arises from 6 April. So fixed rate bonds will pay any interest due before that date net of tax, but any interest due from that date will be paid gross. That will apply equally to the NS&I 65+ guaranteed growth bonds.
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