The sound of silence on savings in the Budget this week was deafening, but just because Chancellor Philip Hammond did not see fit to offer savers any more goods news, that doesn't mean you should forget about existing allowances and tax breaks you can already use.
So, we thought it was worth giving you a quick rundown of what you can already use to legitimately shelter your cash savings from the taxman.
The Personal Allowance – the amount you can earn in a year before you pay any tax – is rising from £11,500 in the 2017/18 tax year, to £11,850 in the 2018/19 tax year. Not a huge difference, but a boost all the same.
Personal Savings Allowance (PSA)
The PSA is essentially a tax-free savings allowance that all basic and higher rate taxpayers are entitled to. A basic rate taxpayer can earn up to £1,000 in savings interest before paying tax, whilst higher rate taxpayers have a lower allowance of £500. It is worth noting that additional rate taxpayers receive no PSA and therefore will pay tax on all savings interest, barring that earned on cash ISAs.
In fact, for all savers, interest earned on cash ISAs does not count against your PSA amount, so cash ISAs remain an effective tax-free savings vehicle for all, but particularly those who earn more interest than the PSA that is applicable to them (if at all).
Starting rate for savings income (SRSI)
This interacts with both the Personal Allowance and PSA and can become relatively complicated. From 2015, the amount of tax you pay on your savings income was reduced from 10% to 0% on the first £5,000 of your savings income and the Chancellor has left this intact in his Budget.
However, this SRSI allowance is restricted by ‘non-savings taxable income’ and the easiest way to identify if you will qualify for it is to add up your total non-savings taxable income, such as wages, pension and any benefits.
If it is below £16,500 – the combined total of £11,500 of your Personal Allowance and £5,000 of SRSI for this tax year (£16,850 for the 2018/19 tax year) – then the SRSI applies.
Bear in mind that for every £1 above the Personal Allowance you have in income, your SRSI is reduced by £1.
If for the current tax year, you happen to have £16,500 or more in non-savings taxable income (or £16,850 for the 2018/19 tax year), then you will not be eligible for the 0% starting rate on savings.
However, you may still be eligible for the PSA, which gives you up to £1,000 of tax free savings income if you are a basic rate taxpayer. As mentioned above, the allowance reduces to £500 if you are a higher rate taxpayer and I’m afraid you will have no PSA at all, if you are an additional rate tax payer.
The ISA Allowance was kept at £20,000 in the Budget, but remember this applies across all types of adult ISA and you can put as much or as little of this annual allowance into ISAs in any combination.
For more information on ISAs download our ISA guide Navigating the ISA Maze.
If you want to transfer your money to a different type of ISA, remember not to close the ISA you want to transfer from; simply ask the new provider to deal with the transfer for you, otherwise the tax benefits on the money you are moving will be removed.
Junior ISA Allowance and Child Trust Funds
Both of these allowances will rise in the 2018/19 tax year to £4,260 from £4,128 in this tax year.
For more information on any of the allowances, call our Bath-based Savings Experts on 0800 011 9705. We’d love to hear from you.