Starting from April 6 this year, millions of UK savers will be able to earn up to £1,000 in interest on their savings each year, without having to pay a penny of tax. While it may come across as a relatively minor adjustment to policy, the fact that it will apply to no less than 95% of British savers makes it one of the most significant shifts to occur in decades.
As it stands, when a basic-rate taxpayer earns £100 in interest on their savings, they immediately lose £20 in taxation. For those in the higher income tax band, £40 is taken for every £100 interest.
As of April 6 however, those in the basic-rate band will be able to take home up to £1,000 in interest on an annual basis, without it being liable for any taxation. Better still, the rule isn’t only applicable to standard savings accounts, but quite literally ALL interest paid out by building societies, credit unions, banks and more. There’s also no application necessary and nothing for savers to do – the automatic elimination of taxation on interest up to £1,000 will be rolled out nationwide as of April 6.
The tax-free interest allowance is reduced to £500 for those in the higher tax bracket, though there are no savings on the cards for people in the additional- rate tax bracket.
Here’s a breakdown of the most important details:
- Taxpayers in the basic-rate bracket (20%) can earn a maximum of £1,000 in interest with no tax payable – a maximum annual saving of £200.
- Taxpayers in the higher-rate bracket (40%) can earn a maximum of £500 in interest with no tax payable – the same maximum annual saving of £200.
- Taxpayers in the additional-rate bracket (45%) will continue to pay tax on all interest earned.
According to the official statement from the Treasury outlining the new policy, no less than 95% of people actively involved in saving will benefit from the change.
In a standard easy access account with interest offered at 1.41% AER, a basic- rate taxpaying saver with just under £71,000 would earn almost exactly £1,000 per year in interest and would not have to pay a penny in taxation. For those in the higher bracket, this would be halved to around £35,000 to earn the maximum £500 in tax-free interest. For those with other accounts offering tax-free interest – Premium Bonds, ISAs – this does not count toward their total annual tax-free interest allowance. Which means that if your ISA was to pay you £500 in tax-free interest, you would still be eligible for the full £1,000 annual tax-free interest.
There will of course be some instances where complications arise – if for example you are currently saving by way of a joint account and the two named account holders are in different tax brackets. Likewise, there is also the possibility of the tax-free interest pushing a saver up in the next tax bracket, which could have wide reaching implications.
For more information on getting the very best out of your new tax-free interest allowance, get in touch with theteam today for an obligation-free consultation.