Happy new tax year - keep more of your saving interest
There's a massive change coming to the savings market that could saving you hundreds of pounds in tax.
When the 2016/17 tax year starts on April 6, banks and building societies will stop deducting tax from the interest you receive on your savings.
And that means most savers will no longer have to pay any tax at all on the interest they earn.
This is thanks to the introduction of the personal savings allowance, which was announced in last year's Budget.
At present, 20% tax is automatically deducted from savings interest by the institution that runs your savings account. So you receive interest net of basic rate tax.
And higher rate (40%) and additional rate (45%) taxpayers are then required to pay extra tax, via the self-assessment system, to reflect the rate they're on.
So basic rate taxpayers get 80% of their interest, higher rate taxpayers get 60% and those on the additional rate get just 55%.
Non-taxpayers, such as children and some pensioners, can already apply to receive their interest gross (using form R85).
And those earning less than £15,600 in wages and interest combined don't pay tax on their savings interest (that's the sum of the personal allowance of £10,600 and the £5,000 savings allowance; the figure is £16,000 in 2016/17, when the personal allowance with be £11,000).
How does the personal savings allowance work?
From April 6, when the new tax year starts, basic rate taxpayers will be able to earn £1,000 of savings interest without having to pay any tax on it (you'll be a basic rate taxpayer in the 2016-17 tax year if your income is less than £43,000).
If you're a higher rate taxpayer, paying tax at the 40% rate on an income between £43,001 and £150,000, you'll get a lower personal savings allowance of £500.
If you're an additional taxpayer earning £150,001 or more, you won't get an allowance at all.
The government estimates that the introduction of the allowance means that 95% of savers won't have to pay any tax on their savings.
What accounts are affected?
In addition to savings accounts, the personal savings allowance applies to interest earned on current accounts, credit union accounts, and peer-to-peer lending.
The only interest which isn't covered by the personal savings allowance is interest which is already tax-free, such as interest from individual savings accounts (ISAs) or Premium Bond winnings.
That's good news. Say you win £100 from Premium Bonds and receive £100 in ISA interest, that £200 won't count against your allowance, and you'll still have your £1,000 personal savings account to cover any other interest you might earn.
So how much can I save before I go over the allowance?
If you had one of the best easy access accounts on the market at the moment, paying around 1.5%, and you are a basic rate tax payer, you'd need to have more than £66,000 in your account before you'd earn enough interest to use up your allowance.
If you're a higher rate taxpayer on the 40% rate, then you'd need to save half this, at £33,000, before
your allowance is used.
If you're on the 45% rate, remember you don't get any allowance.
How will interest be paid from April?
You don't have to do anything to claim the allowance.
All savings interest will be paid with no tax taken off from April 6, so it will all happen automatically. If the interest you earn exceeds the personal allowance, then any tax you owe will be paid to HM Revenue and Customs (HMRC) through your tax code.
If you fill in a self-assessment tax return, then you will repay any tax owed this way instead.
Is there any point still saving into cash ISAs?
Although you need a large amount of savings to use up your personal savings allowance, bear in mind that once interest rates start to rise, you'll need to save much less to reach the £1,000 or £500 threshold.
Remember too that any interest you earn from cash ISAs doesn't count towards your personal allowance, so it's a good idea to make the most of both.
There are also no guarantees how long the personal savings allowance will be around for, with some financial experts claiming that this is more likely to be changed or reversed in future than the tax benefits of ISAs.