Incentive to Save – The new ISA’s and Tax allowances

The 2015 budget delivered by Chancellor George Osborne contained a number of initiatives designed to make saving easier and more attractive despite the record low interest rates we have had in the UK since March 2009.

From 6 April 2015 the 10% starting rate for income tax on savings had already been reduced to £0% on the first £5,000. This affects mostly lower income savers, most notably pensioners whose total income does not exceed their personal allowance plus £5,000.

From April 2016 they have introduced a new personal savings allowance which will allow all basic rate tax payers (those with total earnings under £42,700 in 2016/17) to receive up to £1,000 of savings income tax free. Higher rate tax payers (those with earnings over £42,700 in 2016/17) will receive £500 of tax free savings income whilst additional rate tax payers will have no tax free savings allowance.

From April 2016 all banks and building societies will pay all interest gross and HMRC will include any taxable savings income in the PAYE coding’s of individuals and collect any tax due via the PAYE system.

Furthermore they have introduced two new ISA accounts making tax free savings easier for everyone.

From Autumn 2015 a new Flexible ISA will be made available. This will allow savers to withdraw from the ISA during the year and then  replace the amounts later in the same tax year without affecting the total annual allowance available.

The second new ISA is “Help to Buy” is an incentive scheme to help first time buyers save for their deposit. For every £200 saved in the ISA the government will contribute £50 up to a maximum bonus of £3,000 (the minimum pay out will be £400). However there is the option to take two bonuses where a couple is saving to buy a property together. Each partner can take out their own ISA and earn the bonus.

The accounts will be available for 4 years but once opened can be continued for as long as necessary for saving. The bonus will be available for the purchase of properties up to £250,000 outside London (£450,000 in London). Payment will only be made at the time the home is purchased.

For both ISA’s more details of the actual mechanisms of the schemes will become clear as the products come to market later in the year.