18th March 2015
The Chancellor has unveiled a £1,000 tax-free allowance for savers and new flexibilities to allow Isa savers to take money out of their accounts without losing their allowance.
In his last Budget speech before the general election, George Osborne said Isas would become fully flexible, so that savers can withdraw money from these accounts without losing the allowance they have already built up.
Furthermore, the Chancellor said he would introduce a new allowance for savers, which will mean that their first £1,000 interest earned is tax-free. This will be reduced to £500 for higher-rate taxpayers.
The move will mean a tax cut of up to £200 per year for savers, who will no longer see their interest taxed at source by their bank.
The Government said the new allowance would benefit 28 million savers.
Osborne said he wanted to “move Britain from a country built on debt, to a country built on savings and investment.”
He explained: ” We will introduce a radically more Flexible ISA. In two weeks’ time the changes I’ve already made mean people will be able to put £15,240 into an ISA. But if you take that money out – you lose your tax free entitlement, and so can’t put it back in.
“This restricts what people can do with their own savings – but I believe people should be trusted with their hard earned money.
“With the fully Flexible ISA people will have complete freedom to take money out, and put it back in later in the year, without losing any of their tax-free entitlement. It will be available from this autumn and we will also expand the range of investments that are eligible.”
The Chancellor also said he would introduce a new Personal Savings Allowance that he claimed would take 95% of taxpayers out of savings tax altogether.
He said: “From April next year the first £1,000 of the interest you earn on all of your savings will be completely tax-free.
“To ensure higher rate taxpayers enjoy the same benefits, but no more, their allowance will be set at £500.”
Osborne added: “People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it.
“With our new Personal Savings Allowance, 17 million people will see the tax on their savings not just cut, but abolished.”
The Chancellor pointed out the logistical benefits of the policy. He said: “An entire system of tax collection can be scrapped. At a stroke we create tax free banking for almost the entire population.”
Which? executive director, Richard Lloyd, said: “The Budget has brought good news for struggling savers and pensioners who have been let down in the past.
“The tax break and new flexibilities on savings will prove popular with the millions who have got a raw deal on their savings in recent years. But there are still many savers whose money is languishing in extremely poor paying accounts so the financial industry must now play fair and help people get a better return.”
Maike Currie, associate investment director at Fidelity Personal Investing, added: “ISA savers can now withdraw and replace money from their cash ISA without counting towards their annual ISA subscription limit for that year, as long as the repayment is made in the same tax year as the withdrawal. In the past, when you took money out of an ISA it lost its tax free status.
“Research from Fidelity Personal Investing* shows that ISA savers dip into their ISAs three times a year on average. This doubles to six times a year for those in their 20s and 30s suggesting they need access to this fund over and above their disposable income.
“On the face of it the flexibility to take out money in the same tax year, without losing the tax free status of their savings, therefore looks like a big win. However, unless you were using your full ISA allowance each year, this new found flexibility will make very little difference to you as you will still have some of your ISA allowance left to use. ”