Savers have both new opportunities and new complexities to navigate over the next two years as wide-ranging reforms to the savings and tax landscape are introduced.
A raft of changes taking effect with the new tax year next month will be followed by the launch of the lifetime Isa a year later. But while the introduction of various new allowances and products will come as a boost for those able to save, there are dangers to be aware of too.
Here we look at the new features that will be appearing on the savings landscape over the next two years, along with some tips on avoiding the pitfalls.
Personal Savings Allowance: April 2016
Basic rate taxpayers will be able to receive £1,100 in savings interest before they have to pay tax on it when the new personal savings allowance takes effect next month.
Higher rate taxpayers will get an allowance of £500 a year but there will be no allowance for those on the top rate. The allowance covers all interest, including that on savings, bank and credit union accounts, corporate and government bonds and peer-to-peer (P2P) products.
Elaine McInroy, tax specialist at Saffery Champness, said: “The majority of the population will be largely unaffected by the new allowance – which looks much better on paper than in reality – especially if they are already tax-conscious with their savings and making use of tax-free Isa allowances.”
What to watch for: Anyone exceeding the allowance will need to pay tax on interest through either Paye or the self-assessment system, because savings interest will no longer be deducted at source by the provider.
INNOVATIVE FINANCE ISA/FLEXIBLE ISA: April 2016
Savers will be able to hold peer-to-peer (P2P) products within Isas from 6 April as part of the new innovative finance Isa. Meanwhile, the flexible Isa means savers will be allowed for the first time to take money out of an Isa and put it back in without losing their tax benefits or their allowance, provided they replace the money in the same tax year. Money returned to the Isa in the next tax year will count towards the new annual allowance
What to watch for: Investments in innovative finance Isas will not be protected by the Financial Services Compensation Scheme, so savers could lose their capital, income or both in the event of things going wrong.
DIVIDEND TAX ALLOWANCE: April 2016
The 10 per cent tax credit on dividends is to be replaced on 6 April by a new £5,000 tax-free dividend allowance, above which dividends will be charged at 7.5, 32.5 and 38.1 per cent (for basic, higher and additional rate taxpayers respectively).
Under the existing rules, there’s no income tax on dividend income for basic rate tax payers, but there’s a 25 per cent charge for higher rate taxpayers and 30.5 per cent for those on the additional rate.
“Up to the £5,000 allowance, higher and additional rate taxpayers will be winners here, keeping an additional 33 and 44 per cent of their dividend payments respectively,” said McInroy. “But those with large share portfolios that give them a significant income from dividends will be hit hard by the new rates.”
What to watch for: basic rate taxpayers receiving dividends of more than £5,001 in one tax year will need to complete a self-assessment return to pay the tax charge.
CAPITAL GAINS TAX (CGT): April 2016
This is charged on the proceeds of the sale or transfer of certain assets, above the annual allowance of £11,100 (which remains unchanged in 2016/17).
The higher and the basic rates of CGT will fall from 28 and 18 per cent to 20 and 10 per cent respectively on 6 April.
What to watch for: Gains on residential property investments will be taxed at the current rates (although the proceeds of main home sales will remain exempt). “So if anyone wants to dispose of any paintings, jewellery, antiques, shares, stamp collections, race horses or anything else that might be worth more than they paid for it, then they might benefit from this, but it is unlikely to affect much of the population,” said McInroy.
LIFETIME ISA: April 2017
The surprise policy giveaway in the 2016 Budget will allow anyone aged between 18 and 40 to save up to £4,000 a year into the account. The government will pay an annual bonus of 25 per cent at the end of each tax year, up to age 50. The savings can either be used towards retirement or for a deposit on a first home worth up to £450,000. If it’s the latter, the money can be taken out at any point, including the bonus, provided the account has been open at least a year.
What to watch for: Any withdrawals before age 60 and which aren’t used for house purchase will charged an exit fee of 5 per cent (and be paid without bonuses or interest/growth).
HELP TO SAVE: April 2018
This scheme, unveiled in advance of the budget, will allow people receiving working tax credits or universal credit to save up to £50 a month and get a 50 per cent bonus, earning up to £600 over two years. Savers can continue paying into the plan for another two years and receive another £600 bonus, making a potential savings pot of £3,600, including £1,200 of government top-ups.
Eligibility will be limited to adults getting universal credit with minimum household earnings equivalent to 16 hours at the new National Living Wage (at least £6,365 in 2017-2018) or those still receiving working tax credits.
What to watch for: If you can afford to save into a workplace pension, that will be the better option. Steve Webb, former pensions minister and now director of policy at Royal London, said: “It would be unfortunate if this initiative turned into a new mis-selling scandal, with workers discovering they could have got a better deal from a pension.”