Top tips for savers facing 24% tax on savings and property

Croner. Jason Hollands is managing director, corporate affairs at wealth manager Evelyn Partners.

The Budget saw yet another rise income tax rates for savers and landlords, as chancellor hiked rates up to 49% for highest earners while PSA has been frozen for years. Jason Hollands, managing director at Evelyn Partners looks at potential mitigation.

While the Budget u-turn on plans to cut the cash ISA allowance for people under 65 from next April will be welcomed by many savers, the sting in the tail was the news of a further 2% hike in the income tax rates to be levied on taxable interest from next April, on top of those already announced in last year’s Budget.

From the next tax-year, savers earning interest over and above the annual personal savings allowance face the prospect of a 4% tax hike on interest earned outside of ISAs and pensions.

That will take the tax rates on savings interest to 24% for basic rate taxpayers, 44% for higher rate and 49% for additional rate.

The personal savings allowance – the amount of interest that can be received tax-free - remains unchanged at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers receive no PSA.

But these levels have been frozen since 2016 and so have been withering in real terms once inflation is factored in. Moreover, when the PSA was introduced, savings rates were at rock-bottom with savers receiving around 1.0-1.5% interest, while in recent years rates have risen to around 4.0% or higher, making the allowances a lot easier to breach unwittingly.

There are practical steps savers can consider to mitigate this interest-tax crunch, although the right approach will depend on their circumstances.

1.Cash v investments

First, review whether the balance of wealth held between cash and investments is right for you. Having a cash rainy-day fund is very wise; it can help cover unexpected bills and avoid having to sell investments at the wrong time.

But holding more cash than you need for several years can mean missing out on the potential for longer-term investment growth, and now the much tougher tax treatment of savings interest than gains on investments and dividend income is a further consideration.

Of course, investments involve more risk as markets can fall as well as rise, so this course of action won’t suit everyone.

2.ISA allowances

Second, both the looming tax increases on cash savings and already implemented hikes on capital gains tax (CGT) and dividend taxes, make maximising ISA allowances incredibly important whether you’re a saver or an investor.

Interest, dividends and capital gains within ISAs are tax-free, and the annual ISA subscription limit is staying at £20,000, so a couple could subscribe up to £40,000 a year.

While saving into a pension might be inflexible for younger savers, as it will lock away funds for some time, for those closer to access age this offers another tax-wrapper with generous annual allowances and the added benefit of tax relief on contributions (although funds might be taxable on withdrawal, unlike with ISAs).

3.Personal savings allowance

Third, couples who are married or in a civil partnership should look at their savings and allowances together. Each person has their own personal savings allowance, ISA allowance, as well as annual exemptions on capital gains and dividends.

If such allowances are exhausted but one partner pays tax at a lower rate, transferring cash to them could reduce an overall family tax bill. But this needs to be a genuine transfer: the money becomes theirs, legally and in practice, and they must be free to decide what to do with it, so trust is key.

4. Short-dated gilts

Four, people with substantial cash savings they don’t need immediate access to might explore investing in short-dated, low-coupon gilts. There are numerous gilts that were originally issued when interest rates were very low, many of which are currently trading at prices below the value they will mature at.

While the coupon – the amount of fixed income they provide - is taxable, price gains on gilts are exempt from CGT. Where most of the return made by holding such gilts until maturity will come in the form of a tax-exempt capital gain, this can make them very attractive in terms of the after-tax returns, when compared to the post-tax interest on a cash savings account.

This is especially the case for people subject to the higher and additional rates of tax, and such gilt purchases will become even more relevant given the increases in tax on savings.

5.Premium bonds

Finally, Premium Bonds may also be worth considering for some savers. Adults can subscribe up to £50,000 in these which are then entered into monthly a prize draw. Any prizes are tax-free, but prizes are not guaranteed: returns depend on winning, and the prize fund rate and odds can change.

The Budget is a timely prompt to check how much cash you hold, what you may need access to, and whether your savings are arranged in a tax-efficient way. For larger sums or more complex circumstances, it can be sensible to seek professional advice.