The Chancellor announced a new Personal Savings Allowance in his 2015 Budget, saying that 95pc of people will be entitled to use it. It means that banks and building societies will no longer automatically apply a 20% tax on savings.
Both basic and higher rate taxpayers are eligible for the Personal Savings Allowance, although the maximum amount depends on how much you earn. Basic tax payers (earning up to £42,700) a year will be able to earn up to £1,000 in savings interest tax free, while for higher rate tax payers this amount is reduced to £500.
Additional-rate taxpayers i.e. those with an annual income of over £150,000 will not be entitled to a Personal Savings Allowance.
The aim of the scheme is to reward savers and simplify the current system.
For most, the Personal Savings Allowance will take them out of savings tax altogether, as at current rates you'd need to have saved between £50,000 – £75,000 to earn £1,000 in interest.
Savvy savers looking to take advantage of the new allowance from the onset should for savings accounts that mature after the allowance comes into effect.
A FirstDirect spokesman explained how they will implement the change:
When the new Personal Savings Allowance (PSA) is introduced on 6 April 2016, if a customer's account is due to mature on or after this date, the whole amount of interest will be paid without the deduction of basic rate tax, which is currently at 20pc.
For customers with a Regular Saver account due to mature before 6 April 2015, payments will be made after the deduction of basic rate tax unless the customer has informed us that they qualify to receive their interest without a tax deduction.
The ISA is still alive and kicking
Make no mistake, this is not a substitute for an ISA. What this does is bring savings accounts and ISAs closer together. Remember that once your money is an ISA it's tax free year after year. And whislt at current rates it would take substantial savings in order to hit the £1,000 interest limit, if/when rates return to pre credit-crunch levels of 7%, the tax free interest limit would be reached on savings of £14,000.