Savings rates to drop by 20% in April?
As anyone on a fixed income will tell you, with the Bank of England base rate so low, it ain’t a fun time to be reliant on savings interest or annuity rates. And for those in a certain income bracket, it’s only going to get worse in April.
You see, on 6 April 2011 the personal allowance for those earning under £100,000 goes up to £7,435, but as a consequence and by way of trade off, the limit at which higher rate tax kicks in drops to £35,000, which will bring an estimated extra 750,000 taxpayers into higher rate tax, according to the Institute of Fiscal Studies.
The issue with savings interest is that such income currently suffers deduction of basic rate (20%) tax at source, i.e. the bank whips 20% off your bank interest before you can even think about spending it. However, if you are now a higher rate taxpayer, you will still owe a further 20% tax on that interest which may mean, heaven forbid, you now need to complete a Self Assessment tax return and deal with all the hassles that brings.
It also means that shopping for the best rate available becomes a little more complicated. According to Moneyfacts Best Buys, you will struggle to find a rate, even on a notice account, above 3% pa – take 40% off that and you get a net return of just 1.8%. Shocking.
So what can you do? Well, aside from finding an ingenious way to reduce your income below the new higher rate band level, if you want to save your pennies in the bank, look at the tax-free options like ISAs, provided you haven’t used your £10,200 overall limit (£5,100 for cash) or, if your income may fall in future years, consider investing in longer term bonds or certificates, where the interest will become payable in future years when you may have regained your basic rate taxpayer status.
Or you could be happy that you earn so much and shut up about it...