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Cash Isas to take a back seat as saving made simpler

This article is part of
Key Adviser Issues in Budget 2015

A number of changes to tax allowances will mean a large section of society is better off following this Budget, although perhaps not by a lot.

Savings tax cut

On the savings side, the government will introduce an allowance from 6 April 2016 to remove tax on up to £1,000 of savings income for basic rate taxpayers. This was the final flourish to a speech which claimed to extend a ‘saving revolution’ begun with the merging of Isas last year.

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The allowance will apply to basic rate taxpayers and not apply in the same way to higher earners, which would cover most advised clients.

The allowance will be up to £500 for higher rate tax payers whose marginal rate is 40 per cent. Additional rate taxpayers with earnings above £150,000 and paying the 45 per cent marginal rate will not receive an allowance.

In practice this will mean, taking figures quoted by FTAdviser sister title Investment Adviser’s editor John Kenchington this week, that a basic rate taxpayer in a Newbury Building Society best buy savings account paying 2.1 per cent could have £47,619 saved without paying savings tax.

Even with the reduced allowance, a higher rate taxpayer could still save £23,809 and pay no tax at all on their income. The government reckons 95 per cent of savers will not benefit from ‘free banking’.

Calum Bennie, savings expert at Scottish Friendly, says given that interest rates are set to remain low, the incentives built around tax-free allowances will mean that people can get that little bit extra out of their hard-earned savings.

Mr Bennie adds the changes means cash Isas – which continue to be plagued by low rates - are now likely to become the preserve of higher rate taxpayers. In fact, he says there may be no future for the cash Isa for anyone apart from those who wishing to invest in the newly announced Help to Buy Isa (of which more later in this guide).

Chris Williams, chief executive of Wealth Horizon, agrees the new personal savings allowance could be a death knell for cash Isas. With this sheltering savers cash from £1,000 of income tax, Mr Williams says he struggles to see who will bother using cash Isas until rates improve.

Flexible Isas

Alongside the new personal savings allowance the government claimed to have made cash Isas more flexible. Individuals will now be able to withdraw and replace money from their cash Isa in-year without it counting towards their annual subscription limit.

However this will not immediately come into effect. The government will not change the rules until this autumn following technical consultation with Isa providers.

Some have questioned why a policy ostensibly aimed at increased saving is allowing people greater scope to access and spend their money.

The government, for its part, has deployed the argument it used for pensions freedom: less complexity and greater trust will encourage people to put money aside. In essence the contention runs that if people don’t feel trapped by red tape they are more likely to engage.