Hidden revolution in savings rules proves a bonus for consumers

editorial image
0
Have your say

If you’ve got savings, next time you receive a statement expect to see something rather strange. There’s been a hidden revolution of the savings rules, and it means when you’re paid interest, from now on no tax will automatically be taken off.

It’s all due to the new Personal Savings Allowance (PSA), which launched at the start of the new tax year on 6 April.

Previously, unless you were saving in an ISA, when you earned interest, the taxman took a bite. So for every £100 interest earned as a basic-rate taxpayer, you only actually got £80 (higher rate got £60). Yet now, if you earn interest within your PSA, you get £100 and you keep £100. For a detailed Q&A on it, read www.mse.me/PSA, but here are my quick need-to-knows.

-All savings interest is now paid gross, ie, no tax will be taken off.

-This works for ALL interest - not just savings accounts, but bank accounts, credit unions and peer-to-peer savings. However share dividends aren’t included.

-Basic 20% rate taxpayers can earn £1,000/yr interest tax-free.

-Higher 40% rate taxpayers can earn £500/yr interest tax-free.

-Top 45% rate taxpayers don’t get a PSA, so all interest is taxable.

-Cash ISAs, premium bonds and other tax-free savings interest DON’T count towards the £1,000 (or £500) limit so you can get this interest too.

-If you earn interest over the limit, you pay tax at your income tax rate, but only on the amount over the limit.

It’s worth thinking about this for a moment. For a basic rate taxpayer, with cash in the top easy-access standard savings account, you’d need over £75,000 saved before you had to start paying tax on it. That’s why 95% of people won’t pay tax on their savings interest this year.

As for most people tax is no longer an issue with savings, where you should have your cash has changed. It’s now usually simply a question of where you can earn the most interest.

So first, check your savings today and find what they earn. You’ll be shocked - rates have plummeted.

The first thing you should look at even before saving is clearing any expensive debt or overpaying an expensive mortgage (one where the interest rate is higher than the top rate you can earn by saving).

After that it’s a question of putting each penny where it earns the most. So here’s my savings fountain to do that. Fill up each level if you can and then move to the next (all the accounts I’ve listed have the full UK £75,000 savings safety protection).

1. Help to Buy ISA. For anyone 16+ who’s never owned a home and may want to, these are usually a no-brainer. This is because as well as interest you can use it towards a mortgage deposit and 25% is added on top, up to a maximum of a free £3,000. The top payers are www.halifax.co.uk and www.santander.co.uk at 4%. For full help on if this is right for you, see www.mse.me/helptobuyisa

2. High-interest current account. Some accounts offer high in-credit savings rates to entice switchers - it’s the only way to earn decent interest on decent amounts.

The top ones are the www.Santander.co.uk 123 account paying 3% on between £3,000 and £20,000 (with a £5/mth fee, but that is often covered, as the account also pays cashback on bills) and the www.LloydsBank.com Club Lloyds account, paying 4% between £4,000 and £5,000. Others pay up to 5% interest, though on smaller amounts. For the full range and eligibility criteria see www.mse.me/topbanks

3. Regular savings. These pay high interest but only on small amounts, generally for a short time. They’re great for, er, saving regularly, but you can also trickle lump sums in there too.

The top ones are linked to current accounts – 6% is possible for a year on up to £300 a month in www.Firstdirect.com’s regular saver and 4% on up to £250/month with the www.HSBC.co.uk Premier/Advance accounts. If you’ve got an M&S, Lloyds, Nationwide or Santander current account, see if one’s available to you too.

4. New £15,240 cash ISA allowance - 1.85% tax-free. A cash ISA is just a tax-free savings account and as it’s the new tax year, you’ve a new £15,240 allowance. Crucially, interest from this doesn’t count towards the £1,000 (or £500) PSA limit - so it’s good for those who’ll earn over that threshold. Yet for many there’s little point, see my www.mse.me/ISAsdead guide for when they’re still right for you.

The top straightforward easy access deals is www.coventrybuildingsociety.com, paying 1.4% AER variable (minimum £1). If you’ve got poorly-paying old ISAs you want to transfer, the www.YBS.co.uk Triple Access Saver ISA is 1.35% but only allows you to make withdrawals on three days each year (minimum £100). You can earn more in fixed rate ISAs though, see www.mse.me/cashisas.

5. Fixed-rate savings. If you’ve got money left over, next consider whether you’re prepared to lock it away without access. If so, you can fix with a locked-in rate that’s usually higher than easy-access savings.

The top straightforward 1 year deal is CharterSavingsBank.co.uk 1.91% AER (minimum £1,000) and www.sbiuk.com is 2.2% for 2 years and 2.35% for 3 (min £10k).

6. Easy-access savings. Anything now left over that you need access to can be put in here. Rates are low compared with everywhere else, but you can deposit and withdraw when you want. The top deal is www.ybs.co.uk at 1.3%, though it only allows one withdrawal per year. For unlimited withdrawals, the Income Bond from www.nsandi.com pays 1.26%, though the rate’s dropping in June, but www.sbiuk.com is 1.25%.

Martin Lewis is the Founder & Editor in Chief of Money Saving Expert. To join the 10 million people who get his Martin’s Money Tips weekly email, go to www.moneysavingexpert.com/latesttip