How to use available allowances and tax breaks to protect your savings both now and in the new tax year
As we approach the final month of the 2017/18 tax year, it makes sense to start planning ahead for the new tax year, to ensure you make the most of your cash savings.
We all have to pay tax, but there’s no point in paying more than you need to and as savers are still suffering from low interest rates, it’s important to keep as much of that interest as possible.
There are a number of existing allowances and tax breaks you can already use to legitimately shelter your cash savings from the taxman and we thought it was worth giving you a quick rundown of the potential options, so you can start as you mean to go on, both now, in the new tax year and beyond.
This is one of the first places many savers go to for tax free savings. The ISA Allowance will remain at its current level of £20,000 for the 2018/19 tax year, however this is much improved from the £7,000 allowance available at its inception in 1999, especially for cash savers - who were only able to use part of the allowance until 2015.
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, although there are a plethora of rules that you must not fall foul of, otherwise you might need to unravel your ISA.
If you want to transfer your money to a different 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.
Over the last few years, there has been a drop in cash ISA popularity, but it's important not to simply dismiss ISAs out of hand.
So, if you are paying tax on a savings account, but you haven’t used up your ISA allowance yet, you could be losing out, both now and in the future.
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 per year 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).
The Personal Allowance – the amount you can earn in a year before you pay any tax – is rising from £11,500 in the current tax year, to £11,850 in the 2018/19 tax year.
Not a huge difference, but a boost all the same.
Starting rate for savings
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, although not everyone can benefit.
It 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 your £11,500 Personal Allowance and the £5,000 starting rate (£16,850 for the 2018/19 tax year) – then the starting rate for savings applies.
However, bear in mind that for every £1 above the Personal Allowance you have in income, your starting rate for savings 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 starting rate for 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 you will have no PSA at all if you are an additional rate taxpayer.
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 the current tax year.
Both types of account are an ideal way to build up tax free savings for your children or grandchildren and to start getting them into the savings habit.
If you’re married or in a civil partnership…
You may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.
This allowance enables you to transfer £1,150 (rising to £1,190 in the 2018/19 tax year) of your own Personal Allowance to your husband, wife or civil partner.
In addition, are you and your spouse both using your Personal Savings Allowance? Does your spouse pay less tax than you?
If it could boost the interest you earn, consider putting more savings in their name, as long of course they don’t subsequently then spend it!
For more information on any of the allowances available and for the best options for your cash savings, call our Bath-based Savings Experts on 0800 011 9705. We’d love to hear from you.
Image credit: Oliver Thomas Klein