Majority of savers don’t understand new allowance

Majority of savers don’t understand new allowance

Half of savers are confused about where to put their money after April, according to AA Financial Services.

With a month to go until the personal savings allowance comes into effect, the credit broker commissioned Opinium to survey a nationally representative sample of 2,004 adults during February, finding that 90 per cent of savers do not know what the allowance is.

The personal savings allowance will enable basic rate taxpayers to earn up to £1,000 of income from savings (for example, interest earned) tax free.

Higher rate taxpayers can earn up to £500 of savings income tax free.

Once the personal savings allowance was explained to survey respondents, 49 per cent said they still did not know what to do with their money come the April changes, with the choice between Isas and savings accounts causing most confusion.

One in six (16 per cent) said they would only pay into a savings account from April, while one in 14 (7 per cent) said they would move money out of their Isa and into a savings account.

Michael Johnson, director of AA Financial Services, said the new allowance is good news for savers, but argued that widespread confusion about what it means for people’s money risks undoing the benefits.

“There will continue to be many differences between savings accounts and Isas and the decision on what to do with your money isn’t as simple as comparing rates between saving accounts and Isas.”

Mr Johnson’s important considerations for savers:
How an increase in interest rates will affect themA basic rate taxpayer with £50,000 in a savings account earning 2 per cent will generate £1000 interest – meaning all interest is protected by their PSA. However, on the same balance, if rates increase to 3 per cent they will generate £1500 – meaning £500 worth of interest will become liable to tax.
How a pay rise could affect the value of their PSAA pay rise that takes you from a basic rate tax bracket to a higher rate tax bracket would halve your PSA from £1000 to £500.
How they would build savings over the longer termFor example, each tax year savers get an Isa allowance (currently £15,240 in 2015/16). Consistently using your full Isa allowance over many years means you could build a substantial savings pot protected from both income and capital gains tax.
How Isa allowances can now be inherited.

A deceased spouse can now pass on their Isa allowance to their surviving partner, which they can use on top of their usual Isa allowance.