6th April 2016 sees the introduction of the new Personal Savings Allowance.
It will mean that 95% of savers are expected to pay no income tax on their interest.
The new Personal Savings Allowance means those with taxable income of less than £16,800 will pay no tax on their savings interest from April.
Basic rate taxpayers will be eligible for a £1,000 tax-free savings allowance and higher rate taxpayers will get a £500 tax-free savings allowance.
Despite there being less than a month to go until the introduction of the new Personal Savings Allowance, new research has found very few savers understand how it works.
The research by AA Financial Services found that even once the new Personal Savings Allowance was explained to savers, nearly half didn’t know what to do with their cash savings from April onwards.
The choice between Individual Savings Accounts (ISAs) and cash savings accounts caused the most confusion.
AA Financial Services found that one in six people would only pay into a saving account from April.
One in 14 would move their money out of an ISA and into a cash savings account.
According to Michael Johnson, Director of AA Financial Services, there are several important considerations for savers from April.
Savers will need to consider how an increase in interest rates will affect them.
He gives the example of a basic rate taxpayer with £50,000 in a savings account earning 2% interest. This would generate £1,000 a year of interest, which would be tax-free within the new Personal Savings Allowance.
However, if interest rates increase to 3% then the same amount of cash savings would generate £1,500 of interest, with £500 of this subject to income tax.
Another consideration is how a pay rise could affect the value of the Personal Savings Allowance.
Johnson explains that a pay rise taking you from the basic rate to higher rate tax bracket would halve your Personal Savings Allowance from £1,000 to £500.
Something else to consider is how you would like to build your cash savings over the longer term.
For example, each tax year savers get an ISA allowance (currently £15,240 in 2015/16).
If you consistently use your full ISA allowance over several years, you could build a substantial savings pot which would be protected from both income tax and capital gains tax.
Finally, an important consideration is how ISA allowances can be inherited by a surviving spouse or civil partner.
Current ISA rules mean a deceased spouse can now pass on their ISA allowance to their surviving partner, which they can use on top of their usual ISA allowance.
In our opinion, Individual Savings Accounts remain vitally important for savers once the Personal Savings Allowance is introduced in April.
