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Something for savers to savour!

From April 2016, a new Personal Savings Allowance will mean that for basic rate tax payers the first £1,000 of savings income will be paid free of tax. For higher rate tax payers, the allowance is reduced to £500 and additional rate payers (45% tax payer) will not receive any allowance.

Banks and building societies will no longer deduct 20% income tax automatically from interest paid on deposits held outside of an ISA. Given the new limits, this will enhance and simplify savings strategies for individuals.

From Autumn 2015, ISA investors will be able to withdraw monies from their ISA without affecting their annual contribution allowance. Under current rules, if an investment is made to an ISA and monies subsequently withdrawn in the same tax year, the investor is not able to pay additional monies into the ISA to replace the withdrawn sum.

Under the new rules, an investor could, for example, maximise their ISA allowance of £15,240, withdraw £10,000 in order to meet some unforeseen expenditure, then reinvest this £10,000 back into the ISA later in the same tax year, ensuring that they do not lose out on the valuable allowance as a result of the withdrawal.

The guidance documentation suggests that this flexibility will only be available for withdrawals from Cash ISAs. There is no suggestion that the same will be applicable for Stocks & Shares ISAs; however, these changes remain subject to consultation and so could be extended.

A further change is the introduction of the Help to Buy ISA from Autumn 2015. These will be Cash ISAs available for individuals who are aged 16 and over, saving to purchase their first home. The key benefit of the accounts will be that a bonus of 25% of the amount saved will be added by the government. This bonus will only be added when the monies are used to fund the house purchase.

A number of restrictions apply to the accounts. The maximum initial deposit which can be made into the account is £1,000 with maximum monthly contributions of £200. The maximum amount which will be applied as a bonus is £3,000, effectively meaning that the 25% bonus applies only to the first £12,000 saved. The bonus will only be applied if the monies are being used to purchase a home valued up to £450,000 if in London or £250,000 if outside of London.

Given these limits, it would take over four years to save the maximum £12,000; at this stage it is not clear whether the individual themselves must save the money or if the contributions can be made by a third party, such as grandparents.

It is important to note that it is only possible to subscribe to one Cash ISA provider per tax year. By saving into a Help to Buy ISA an individual will be using their Cash ISA allowance with the contributions being capped at £200 per month, and will not able to save into an another Cash ISA in the same tax year. However, the new Personal Savings Allowance will mean that the first £1,000 of interest will be paid tax free for basic rate tax payers, meaning that additional contributions could be made to a non-ISA savings account and still benefit from tax free interest.



Date: 19th March, 2015
Author: Iain Muffitt - Financial Adviser


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