Cash Isas to take a back seat as saving made simpler

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.

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.

Scottish Friendly’s Mr Bennie simply questions why the greater flexibility for Isas only applies to cash Isas. He says: “There should be the same flexibility for stocks and shares Isas as this could be beneficial to investors.”

Personal taxation

The main changes to personal taxation saw a further rise in the lower rate of income tax from next year, with the minimum earnings that need to be earned rising to £10,800 for 2016/2017 and £11,000 in 2017/2018.

At the same time, the government brought forward the first part of its plan to increase the basic rate threshold, which will rise above inflation for the first time in this parliament to £31,900 for 2016/2017 and £32,300 for 2017/2018.

As a result, the rater at which the higher rate 40 per cent band will kick in will be £42,700 in 2016/2017 and £43,300 in 2017/2018.

From 2016, there will be one income tax personal allowance regardless of an individual’s date of birth.

The national insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. There was no change in the lower rates at which NI is paid, which some claim would be a far more effective tax cut for the low paid than changes to income tax.

As part of the planned reforms to tax administration, the government will abolish class two national insurance contributions in the next parliament and will reform class four to introduce a new contributory benefit test.

The government will consult on the detail and timing of these reforms later in 2015.

Tax return automation

One of the biggest changes for your self-employed clients will be the end to paper tax returns.

The government will introduce digital tax accounts to remove the need for individuals and small businesses to complete annual tax returns. At this stage there are very few details about how this will work in practice - but it is believed fines for late final submission will actually increase.

Further details on the policy and administrative changes needed to deliver this will not be published until later in 2015.

The government will also not consult until after the general election on a new payment process that will be needed to enable tax and national insurance contributions to be collected through digital accounts instead of self-assessment.

Separately and as part of the savings tax changes, HMRC will introduce automated ‘coding out’ of savings income that remains taxable through the PAYE system from 2017/2018 with pilots starting in autumn 2015.