Boost your Personal Savings Allowance from £500 to £1000 (and earn more interest on your savings than any Cash ISA!)
In this year’s Budget, the Chancellor introduced a new tax-free allowance for savings interest called the Personal Savings Allowance.
Put simply, if you only pay tax at the basic 20% rate you get a tax-free savings allowance of £1,000 each tax year. If you pay tax at 40% you get a £500 allowance and if you’re shelling out tax at 45% you get no allowance at all.
In the past, interest received from the vast majority of saving institutions such as UK Banks and Building societies was subject to an immediate tax deduction of 20%. So if you earned £100 of interest you would only have been credited with £80.
From 6th April 2016 though, interest is being paid GROSS with no 20% deduction.
That’s great news for people like my partner who don’t have enough income to cover their personal tax-free allowance of £11,000 a year. Now she won’t have to submit an R40 claim each year and wait months for HMRC to refund tax she shouldn’t have paid in the first place.
Added to this, she can also earn £1,000 in interest this coming year completely tax-free.
However, where you really need to be careful is when your earnings cross the £43,000 threshold. Receive even £1 over this in income and you’ll lose the chance to receive £1,000 of tax-free interest and will only qualify for up to £500.
When this happens, your best bet is often to pay the amount that takes you over the threshold into a Self-Invested Personal Pension (SIPP).
So, if your total taxable earnings are £45,000, you can put £1,600 into a SIPP and find yourself back under the higher rate threshold.
But why £1,600 and not £2,000? It’s because you’ll get an immediate tax top-up from the government on your pension payment. You pay the amount less 20% and HM’s good old government will pay the extra £400 directly to the SIPP provider within a month or two!
And there’s more… if you are aged over 55 you can immediately withdraw £500 of that £2,000 tax-free if you want to.
Now that’s what I call effective tax planning – I think I may even apply for a job with Martin Lewis!
So how can you get a better rate of interest on your savings than you can in most tax-free ISAs (which are paying measly rates of interest at the moment)?
Well, whilst the best instant access cash ISA rate I can find is about 1.4%, there’s one account on the market that pays 3% on balances between £3,000 and £20,000.
The Santander 123 account is, as far as I can see, the only one to offer this rate on such a large amount. If you have over £3,000 in the account you will receive 3% interest paid monthly. And from 6th April this year that interest will be paid gross with no tax deducted as well.
Any catches? Two simple conditions only, which most of us will qualify for.
- You have to pay at least £500 a month in from a non-Santander account.
- You need to have at least two active direct debits set up on the account.
Ahhh I hear you say… but what about that monthly fee of £5?
Well yes there is a £5 monthly fee but if you pay all your household bills through the account by direct debit, you get credited with a cashback each month that in most cases will easily cover the £5 and probably make you a good profit to boot.
You can get varying amounts of cashback on Council Tax, Water bills, Gas, Electricity, Phone Bills, TV subscriptions etc. – full details can be found here:
I have used First Direct for my household billing account for many years as it’s a really efficient bank but the opportunity to earn 3% tax free on £20,000 was just too good to miss.
So I’ve just opened an account myself and am about to find out if their automatic switching process where everything is moved over for you, works as smoothly as they tell you it will.
Seems like a total no brainer to me…!
Image credit: Flickr