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Time for savers to cash in on tax-free interest allowance

30th March 2016 Print

When the personal savings allowance (PSA) comes into force from 6th April, UK adults could save up to £69,000 before having to pay tax on the interest, according to MoneySuperMarket calculations.

MoneySuperMarket has analysed the top paying savings products available to all consumers, and found that, once the PSA is introduced next week, basic rate tax payers can accumulate as much as £68,965 and not pay any tax on the interest with the top paying easy access saving account from RCI Bank, which offers 1.45 per cent AER. Higher rate tax payers using this account would be able to save £34,482 before reaching the £500 taxable interest threshold.

Those saving via a fixed term bond will also reap the rewards of the new PSA. For example, the leading online one year fixed bond from Charter Bank has an AER of 1.91 per cent, meaning savers can accumulate £52,355 (basic tax payers) or £26,177 (higher tax payers) before having to hand over anything to the taxman.

From next Wednesday, most UK adults will be able to earn up to £1,000 interest a year on their savings without having to pay any tax on their money. Higher rate tax payers will be able to earn £500 interest tax free. Those on the 45% additional tax rate do not receive a personal tax allowance.

This new allowance will save consumers a considerable amount – at the moment basic tax payers lose £20 for every £100 they earn in interest, and those who fall into the higher rate tax bracket have to hand over £40.

Kevin Pratt, consumer affairs expert at MoneySuperMarket, said: “The personal savings allowance is a gift for consumers, most of whom will not pay any tax whatsoever on their savings from next week. This is clearly great news for our bank balances – particularly in this low interest rate environment – and savers should make the most of it.” 

Other ways to save

Current accounts still provide a great way to save, with competitive in-credit interest rates. For example, Nationwide’s FlexDirect account offers 5.00 per cent AER on balances up to £2,500, while Santander’s 123 account pays 3.00 per cent AER on balances between £3,000 and £20,000. Any interest earned in a current account also falls within the PSA and so will be protected from the taxman until the £1,000/£500 limit is reached.

ISAs continue to be an important savings tool as well. Interest earned on an ISA does not count towards the new PSA allowance, so consumers can earn tax-free interest on an additional £15,240 this tax year, and in 2016/17. The Post Office’s Premier Cash ISA offers a rate of 1.40 per cent and is available to all.

Kevin Pratt continued: “Any interest earned from cash ISAs doesn’t count towards your personal savings allowance, so ISAs remain a valuable way to shelter savings from the taxman’s clutches. The ISA allowance is also set to increase by 31% in April 2017 from £15,240 to £20,000, and at the same time we’ll also see the introduction of the Lifetime ISA for those aged between 18 and 40, where the Government will pay a bonus of £1 for every £4 saved up to £4,000 a year.

“There’s now a wide range of options to help you save money, so it’s well worth exploring the market to find the right product to reach your goal. Whether it’s an easy access account or one that ties up your money for a fixed period in return for a higher rate, it’s important to find the most suitable deal for your needs.”

MoneySuperMarket has created a savings calculator to help consumers find the best way to reach their savings goal. The calculator lets you see how long it will take to reach your target amount, and you can also find out how much you will need to put by every month to reach your target.