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19 March 2014

Further increase to the tax free personal allowance

The amount of income at which an individual will start to pay tax was already set at £10,000 for 2013/14 and the Chancellor has gone even further to increase it to £10,500 from 6 April 2015.  Individuals born before 5 April 1948 will continue to enjoy a slightly higher personal allowance of £10,660.

The rate at which an individual will pay higher rate tax in 2014/15 is up by £415 to £41,865 and then for 2015/16 increases by a further £420 to £42,285 meaning that even higher rate tax payers will benefit from some tax savings.

Measures introduced to encourage saving

Currently, there is a 10% savings rate on interest received of up to £2,790 above the personal allowance.  This rate will be reduced to 0% on interest received up to £5,000 above the personal allowance from 6 April 2015.  As is the case currently, the savings rate only applies where earned income is less than the personal allowance together with the savings rate band, so generally will be most beneficial to individuals who have little or no earned income. 

This will also alleviate the administrative burden for many pensioners or low earners who before this measure would have had to claim back overpaid tax each year from HMRC as a result of banks deducting tax at source.

NISA ISAs?

The ISA annual subscription limit will increase from £11,520 to £15,000 from 1 July 2014 and at the same time ISAs will be reformed into the ‘New ISA’ (NISA) which will remove the previous restriction on only being able to invest up to 50% into cash.  It will now be possible to convert stocks and shares ISAs into cash ISAs and the range of investments available in an ISA will be increased.

Subscription limits for Child Trust Funds and Junior ISAs will also be increased to £4,000.

New National Savings products

The Premium Bond investment limit will be increased from £30,000 to £40,000 from 1 June 2014 and by a further £10,000 to £50,000 for 2015/16 with the frequency of £1m prize draws increasing to two per month from August 2014.

Tax free income of up to £15,500 and tax fee savings

Taking all the above together, an individual who earns less than £10,500 but has investment income as well, will enjoy entirely tax free income of up to £15,500 during 2015/16, and will be able to invest an extra £3,470 per year into ISAs.  If they have already maximised their Premium Bond purchases they can even top up their holding by £20,000.