The new personal savings allowance changes the tax-free investment landscape for British taxpayers.
Under the allowance, interest on savings is paid gross and the first £1,000 earned by basic rate taxpayers and £500 for higher rate taxpayers is tax-free.
Additional rate taxpayers are excluded from the scheme.
A bonus is that peer-to-peer lending income for investors is classed as savings income, so offers a tax shelter for higher yield investments.
With peer-to-peer lenders such as Ratesetter and Zopa regularly yielding more than high street savings account returns, the allowance is an opportunity to boost income.
P2P drawbacks
Even if peer-to-peer lenders were giving a yield of 6%, investing £15,000 with them would give a return on investment of £900 a year tax-free.
The drawback is peer-to-peer lending is not covered by the Financial Services Compensation Scheme, so if the lending platform collapsed or the transaction turned sour, investors could not take the matter to a financial ombudsman or to the Financial Services Compensation Scheme for redress.
The other advantage of peer-to-peer lending is the returns match or are higher than those offered by banks or building societies, but with traditional bricks and mortar institutions, accounts come with tie-ins and minimum deposits.
According to Zopa, the average investor has £6,000 in peer-to-peer lending, which makes this type of saving tax-free for most investors.
Pension tax changes
The personal savings account also casts doubt on whether to lend through an ISA or whether to reserve the tax-free cash returns for dividends and other taxable investments.
The other question that remains to be answered is whether the personal savings allowance and new ISA rules are a precursor to Chancellor George Osborne’s hints that he is about to change the way tax relief is applied to pension contributions.
He has promised to reveal all in his upcoming Budget 2016, and so far the Treasury has remained tight-lipped about any changes, merely saying that the government has yet to make any decisions over the matter and several ideas are on the table about pensions and tax.
Lastly, anyone with a total taxable income of less than £17,000 will pay no tax on savings income.
