In his budget today Chancellor George Osborne announced that the first £1,000 of interest earned on savings will be completely tax-free for lower earners from next year,
This move will bring a smile to the faces of savers who have suffered from rock bottom interest rates in recent years, the new allowance, which will come into force from April 2016, is expected to see more than 9 out of 10 taxpayers no longer paying tax on their savings interest.
Basic-rate taxpayers will be eligible for the full £1,000, while higher-rate taxpayers – those who earn more than £42,701 and less than £150,000 – will qualify for a reduced £500 interest cushion.
The Chancellor told the House of Commons: “People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it.”
Andrew Hagger personal finance expert from MoneyComms, said: “It’s a breath of fresh air for hear savers – they will welcome the news that tax has been slashed from savings in today’s Budget.
“The long overdue move will help the less well off, and pensioners, and hopefully today’s announcement will kick start the savings habit in the UK.”
However, Hagger pointed out that historically low interest rates continue to have a major impact on some people’s incomes and the new savings personal allowance whilst welcome isn’t going to replace the lost income savers have suffered during the last six years.
“Only long term higher savings returns will revive the savings culture in this country,” he added.
With the average easy access savings account paying a paltry 0.6% Hagger said “This is a small step in the right direction but substantial rate rises are needed if consumers are to notice a meaningful difference in their savings income”.
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