There is still no sign of when a rate rise will take place but the news in Wednesday’s budget focused on the growing strength of the UK economy, which will of course ultimately lead to the much needed increase in interest rates.
However the chancellor hailed a savings revolution with key changes to support savers. Following last year’s Budget to reward savers, this year it was all about the radical changes to encourage us to save. Vote winning exercise it may be, but it’s certainly bringing some much needed positive news to the savings landscape.
The key principal changes to impact savers are as follows;
Personal Savings Allowance
A new personal savings allowance of £1,000 will be introduced in April next year, (2016) removing the first £1,000 of savings income from income tax for basic rate taxpayers. HM Treasury states this will take 95% of taxpaying savers out of savings tax altogether.
A higher-rate taxpayer will benefit from a smaller personal savings allowance of £500 and anyone earning more than £150,000 a year will not receive the benefit of the new savings allowance at all.
An important knock-on effect of these changes will be that from next April, banks and building societies will no longer deduct 20% income tax automatically from savings held outside an ISA.
Making ISAs more flexible
From later this year, people will be able to move money in and out of ISAs without this affecting their tax free contribution limit. So long as ISA money is taken out and replaced during the current tax year, such a move would not count towards the annual ISA contribution limit, which is due to rise to £15,240 this coming April.
This new flexibility will apply to cash ISAs only, not to stocks and shares ISAs and is scheduled to take effect from autumn 2015.
Help to Buy: ISA
A new ‘Help to Buy’ ISA will be launched to help first time buyers save for a deposit. The government will add a further 25% to contributions made by the saver. So for the maximum monthly saving of £200, the government will contribute £50, with a maximum government contribution of £3,000 on £12,000 of savings.
The maximum initial deposit is £1,000 in addition to the maximum monthly contribution of £200.
The accounts will be available via the banks and building societies in autumn.
Savers will have access to their own money and will be able to withdraw funds from their account if they need them for another purpose, but the bonus will only be made available when you buy your first home and only on properties of up to £450,000 in London and £250,000 in all other areas.
The Help to Buy ISA scheme is an interesting incentive, although some might argue that it fails to address the fundamental issue causing the housing crisis, which is lack of supply. While such a hand-out will make headlines, the only real impact it will have on the housing market will be an inflationary one.
The housing crisis is now so severe that by the time it takes the average person to save £12,000 in the ISA, the price of an average house will have soared by £50,000, based on the latest statistics from the Office for Budget Responsibility (OBR).
To help pay for some of these tax concessions, the chancellor announced plans to further restrict pension tax relief.
From 2016-17, the lifetime allowance - for pension savings that can be accumulated free of tax - will be cut from £1.25m to £1m. This will save the taxman £300m in 2016-17, rising to nearly £600m in 2019-20.
From 2018, that allowance will be indexed to the consumer prices index (CPI) and will therefore start to rise again.
There will be no change to the annual allowance for pension savings, which stays at £40,000.