New tax-free savings are almost here
With a week to go until the new personal savings allowance kicks in, do you know how it’s going to affect you? Or is the piddly amount of interest you might earn not really worth bothering about?
Described as one of the biggest changes in personal finance this year (along with the new dividend taxation rules), from 6 April all basic and higher-rate taxpayers will benefit from a tax-free allowance that applies to amounts earned on savings.
Basic rate taxpayers will get a whopping £1,000 tax free amount (which equates to having £50,000 on deposit at 2%), and higher rate (40%) taxpayers will get a smaller £500 allowance (for 2016/17 those earning £43,000 or more will be higher rate taxpayers). Additional rate (45%) taxpayers get nothing.
In practice, how this will work is that banks and building societies will no longer deduct 20% income tax from savings interest before you get it. For most people (ie those with less than £50,000/£25,000 in the bank) this will mean no tax is paid, and no tax is due. For those who are lucky enough to have to pay interest on savings, however, HMRC have said they will attempt to collect it in other ways, probably via PAYE coding notice where possible:
“Most people will not need to do anything, whether they are basic rate taxpayers with savings income below £1,000, or higher rate taxpayers with savings income below £500. Their bank/building society will simply stop deducting tax on the interest they pay."
In the (anticipated to be) small number of cases in which PAYE collection is not possible, HMRC “are looking at a range of options to make it easy for customers to pay the tax that is due, again using the information provided to us by account providers. Further information will be provided in good time, before any tax is due.”
Susan Hannums from savings advisers Savingschampion.co.uk, said that most people remain “grossly uninformed” about the changes, however, and described a "vast difference" in the information being offered by banks and building societies, ranging from "well produced, detailed brochures" to "a few lines in generic customer communications". So has your bank made you aware of the changes, or are you languishing in blissful ignorance? Do banks still have an obligation to educate people if they are earning paltry pounds’ worth of interest only?