Savers are to be rewarded with a new personal savers allowance, which the Treasury said would take 95 per cent of taxpayers out of savings tax altogether.
In a nod to the difficulties imposed on savers by unimpressive interest rates, the chancellor has introduced an allowance of £1,000 of interest earned on savings. Those whose taxable income is less than £42,700 a year will be eligible for the new tax break, while people earning between £42,700 and £105,000 will be granted a £500 allowance.
George Osborne said yesterday that 17m people will see tax on their savings not just cut, but abolished.
“People have already paid tax once on their money when they earn it,” he said. “They shouldn’t have to pay tax a second time when they save it. An entire system of tax collection can be scrapped. At a stroke we create tax-free banking for almost the entire population.”
Osborne said the move would allow Britain to build the economy “on savings not debt”.
He also introduced a new fully flexible ISA, which will give people complete freedom to take money out, and put it back in later in the year, without losing any of their tax-free entitlement.
David Norton, head of investments at AES International, said this would be “very welcome news for many who in the past may have suffered a tax hit when using their money”. However, he added: “I would urge caution to investors considering making more esoteric choices, as an ISA should generally be seen as a tax efficient savings tool, rather than a place to take risky bets.”
Accountancy firm PwC said the personal savings allowance was one of the biggest giveaways in yesterday’s Budget, but warned that it could catch savers out. “While welcomed by those who benefit, the allowance does put the compliance onus on taxpayers,” said Alex Henderson, tax partner at the firm. “If you become a higher rate tax payer, it’s your responsibility to pay the additional tax due and this has become more complicated.”
Meanwhile, the allowance for tax-free pensions was cut from £1.25m to £1m.