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A Budget for Savers

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25 March 2015
George Osborne proudly presented a ‘savings revolution’ in the Budget last week. A new Personal Savings Allowance was announced as well as a Help to Buy ISA and measures allowing savers to take money out of their ISA and replenish the funds without losing their tax-free entitlement.
This follows the raising of the ISA allowance to £15,000 last year and the ability to pass an ISA to a spouse tax free; as well as the widely discussed new pension freedoms which start in a few days time from 5 April this year.
So what does it all mean for savers? As usual it depends on who you are and how much tax you pay.
Those who have saved in their pension funds for many years are no longer forced to buy annuities. They will be able to make withdrawals as and when they like. Usually the first quarter will be tax free and income tax will be payable on the balance thereafter each tax year. From April 2016 the five million people who already have annuities will also be able to cash them in if they wish.
Having this freedom and flexibility with pension capital will, I believe, encourage people to invest in pensions, as will the tax relief available when contributions are made, and the recently introduced inheritance tax breaks for pension funds.
Those who have significant savings in pensions, however, will be disappointed that the pension cap, which started at £1.8m is to be reduced from £1.25m to £1m. The allowance will then be frozen for two years before becoming indexed linked from 2018. Any excess monies withdrawn above the cap are taxed at a penal rate of 55%.
It is a similar story for those paying the highest taxes with the new Personal Savings Allowance to be introduced in April 2016. For basic rate taxpayers the first £1,000 of savings interest will be tax free; this limit is £500 for higher rate taxpayers whilst additional rate taxpayers (earning more than £150,000 per year) do not get a Savings Allowance at all.
With saving rates as they are at the moment the new allowance will allow basic rate taxpayers to put about £70,000 into their instant access accounts before any tax will be payable on the interest. For those with higher interest accounts (such as those with a five year lock up) about £33,000 could be saved before tax would become payable on the interest arising.
This rather suggests that the cash ISA will become pointless for basic rate taxpayers until interest rates increase significantly. Their tax free status, however, will continue to appeal to higher rate and additional rate taxpayers.
Definitely, therefore, a Budget for low and middle income savers; but not one for those with really significant sums to invest.