If you are British, you will, along with myself, be entering into the new tax year and there are some big changes in the way we save.
It’s going to be very different and in terms of savings, there are potentially many benefits to be had with your bank, but be careful; the truth is that it is not as straightforward as you may think!
- By choosing a higher interest rate, non- ISA, account you can earn up to £1000 or £500 tax free interest this year, depending on your tax bracket. Your interest, however, is taxable income, so if you are teetering near the edge of your tax bracket with your income, or expecting a windfall, you ought to be cautious on choosing your account. You could end up pushing yourself into a higher tax bracket and essentially earn less money throughout the year. So be wise about your savings decisions and take all scenarios into consideration!
- If you have a bond maturing this year, it will be counted into the tax free earnings interest and your annual personal allowance. That means if you have opened a bond last August and it’s maturing this August, all that interest is potentially tax free. This sounds great, but if you have just opened a high interest rate saver or current account, you’ve greatly increased your taxable earnings and now you need to add those amounts together. If you are in the lower tax bracket and push yourself into a higher bracket only £500 is tax free and the tax on the rest of your earnings goes from 20% to 40%!
- Monthly monetary rewards from any of your accounts, also count as taxable earnings, including cash-back schemes! These things add up. On the whole, you can make it work for you and possibly earn some extra cash, but what you don’t want to do is push yourself into a higher tax bracket and end up slightly worse off (remember the tax free allowance also shrinks). Don’t worry though, ISA rates may be less at the moment but ISA’s will never eat into your taxable earnings, so you just have to be cautious about it.
There is potential for people on lower incomes to benefit from the scheme, but in reality, people who have very low income use all their cash and wont really earn interest anyway. People a little bit better off can potentially end up just the same or worse off by pushing themselves into different tax bands, but surprise surprise, like all good Conservative schemes, the rich can benefit immensely with stocks and shares and help to buys and bonuses for maxing out their ISA’s.
Making the ISA “more accessible” actually just means, that if you don’t earn a lot of money throughout the year, you can’t use a flexible ISA to potentially transfer in and out the same sum to reach the maximum deposit limit and gain the bonus the government are offering for doing so (which is probably bigger than your interest you will earn on the account). It means only people who have enough money a year to deposit what is greater than a lot of peoples annual income benefit from that bonus.
- You may now be able to move your money around by law in and out of your ISA without reaching your yearly deposit limit but the ISA you choose may not let you move your money in and out whilst still earning interest. A banks terms and conditions are not the same as the governments saving allowances. Do not confuse the two!
The Help To Buy ISA, I am undecided whether this is a detractor or not; it looks as though it’s worth it if you have the money to ensure you get your extra 25% bonus. Especially if you aren’t planning on moving immediately and the fact that now you can earn extra interest on your other accounts, however this last part is what makes it tricky.
If you are younger it will probably benefit you most, like with the apprentice schemes; but if you are part of the 2008 young adult generation you are likely to be no better or worse off, again like with the apprentice schemes.
Most importantly: always shop around, always read full terms and conditions and don’t rush in just because it’s past April 5th!
DirectGov.com government guide
Martin Lewis Guide savings advice website
MoneySuperMarket comparison website
Meerkat Advice comparison website