Access the new tax-free savings allowance almost a year early?
You may recall that, in March’s Budget the Chancellor announced a new plan to take 95% of savers out of tax on the interest on their savings. However, rather than wait until April 2016 to take advantage, why not start earning tax-free interest now. Interested?
You see, the new limits of £1,000 worth of interest for basic rate taxpayers, and £500 for anyone paying higher rate tax (if you pay additional rate tax at 45%, the Government reckon you can do without the savings allowance), take effect from April 2016,and at that point, given the vast majority of taxpayers won’t be paying tax, banks will stop deducting 20% tax at source (ie before you even receive your interest payment, as they do currently). However, if you are savvy enough to open an account that doesn’t pay interest until after 5 April 2016, then all of the interest falls into the 2016/17 tax year, and the new savings allowance applies.
And it’s official. A spokesman for HMRC told The Telegraph: “If a savings product, such as a one-year bond, taken out now, pays out interest before April 2016, the saver will not be able to benefit from the new personal savings allowance as they have a right to access interest before April 2016. But if they cannot touch the interest before April 2016, the saver can take advantage of the new allowance.”
So, what you are looking for in order to facilitate this wheeze are accounts that only pay interest annually. You might consider the market leading Virgin Defined Access E-Saver, which pays 1.41% gross, which would allow a basic rate taxpayer to stash £70,920 into the before breaching the savings allowance threshold, halved to £35,460 for higher-rate taxpayers. However, closer inspection of the terms and conditions reveals that the annual interest isn’t paid on the anniversary of account opening, but is instead credited on 11 March each year. Which means the interest will be taxable, and the net equivalent is reduced to 1.13%
Consequently, the second best product on the market, the Paragon Bank Limited Edition Easy Access, begins to look more attractive, given its rate of 1.35% gross paid annually on the anniversary of the account opening, and therefore tax free so long as it falls within the savings allowance amount.