Savers have been handed some much-needed support at the start of the new tax year, but the number of government initiatives could actually be discouraging people from saving their cash.
The Personal Savings Allowance (PSA) was announced in March’s Budget and took effect at the start of the 2016/17 tax year. Under the new rules most people will be able to earn tax-free interest on their savings. Previously all cash which was not placed in an Individual Savings Account (ISA) was subject to tax at the same level as an individual’s income.
Now anyone with taxable income of less than £17,000 will not pay any tax on their savings interest, regardless of the type of account it is housed in. Those with income of up to £43,000 can earn £1,000 in interest from their savings without being taxed while higher rate taxpayers earning between £43,001 and £150,000 will recieve a PSA of £500.
Anyone with a taxable income of more than £150,000 will continue to be taxed on all savings held outside of ISAs.
Despite the boost for long-suffering savers, the introduction of the PSA has resulted in further confusion over the various products and schemes on offer. A study conducted by Skipton Building Society found that almost half of those surveyed were unsure of their ISA entitlements.
All people aged 18 and over can invest up to £15,240 in an ISA and pay no tax on the interest earned, regardless of income. This sum can be split between a cash ISA and a stocks and shares ISA, although research found 44 per cent people were unaware of the current limits.
The building society warned that the number of options available could actually be dissuading people from saving. A tenth of those surveyed attributed their low levels of savings to a lack of understanding.
Help to Buy, Innovative Finance and Flexible ISAs have also been introduced recently, adding to consumer confusion. A lifetime ISA scheme to help under-40s save for a home or retirement will also launch in April 2017.
Additionally, more than a fifth of people did not know how an ISA differs from a standard saving account. Those aged 45 and over struggled most with the various rules. Some four fifths said it was unclear whether they could invest in more than one ISA product during each tax year while 74 per cent did not know that the new Personal Savings Allowance exists.
The paltry interest rates on offer are also unlikely to encourage people to save cash. To combat this, savvy savers have been urged to maximise their earnings by investing and opening savings accounts early in the tax year.
Research by Fidelity showed that an investor who maxed out their stocks and shares ISA at the start of the each tax year for the past decade would now be more than £8,000 better off than if they had left it until later in the tax year.
Using a typical investment in the FTSE All Share index, the ‘early bird’ saver would have seen a return of £144,580 on an initial investment of £109,320. A last minute investor – who used the allowance on the final day of each tax year – would have returned £136,264 on the same amount.
While not everyone will have enough cash to invest at the start of the year, anyone investing in 12 monthly instalments would have also enjoyed far better returns – £142,502 – in this scenario.
However, many people still prefer to leave it late with the investment firm reporting one of its customers used the last of their ISA allowance just 23 seconds before the end of the 2015/16 tax year.
Adam Williams is a freelance financial journalist