Martin Lewis: Be ready for quiet savings rules revolution
AS interest payments on all savings becomes gross, Martin Lewis says make sure your cash is in the right place
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 April 6. 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 per cent rate taxpayers can earn £1000/yr interest tax-free. Higher 40 per cent rate taxpayers can earn £500/yr interest tax-free.
Cash ISAs, premium bonds and other tax-free savings interest DON’T count towards the £1000 (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.
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 per cent 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 usually just a question of where you can earn most interest.
So check your savings today and find out what they earn. Before saving, look at 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 accounts listed have UK £75,000 savings safety protection).
1. Help to Buy ISA. 2. High-interest current account. 3. Regular savings. 4. New £15,240 cash ISA allowance. 5. Fixed-rate savings.
Anything now left over that you need access to can be put in easy-access savings. 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 per cent, though it only allows one withdrawal per year.