A boost for pensioners?

A boost for pensioners?

In his speech on Budget day 2014 the Chancellor set the scene stating that 'If you're maker, a doer or a saver: this Budget is for you.' So what did he do for savers?

One surprise announcement related to reducing the tax burden for some in relation to their savings income, meaning interest income. From 6 April 2015, the maximum amount of an eligible individual's savings income that can qualify for the starting rate of tax for savings will be increased to £5,000 from £2,880, and this starting rate will be reduced from 10% to nil.

How does it work?

The starting rate is not available if taxable non savings income (broadly earnings, pensions, self-employed profits and property income) after allowing for the personal allowance exceeds the starting rate limit. This means that in 2014/15 an individual who generally has more than £12,880 (£2,880 staring rate limit plus the £10,000 personal allowance for those aged under 65) non savings income will not be able to benefit from the 10% rate and will suffer the normal basic or higher rates of tax on their savings income. An individual for example, with £11,000 earned income and savings income of £1,000 will benefit from the 10% rate instead of the usual 20% basic rate on the £1,000 savings income, a saving of £100.

Who will benefit?

The proposed changes will increase the number of savers who are not required to pay tax on savings income, such as bank or building society interest. Pensioners who only have modest pensions will in particular benefit. This is because pension income may be their only non savings income and where that is covered in full/mainly by any personal allowances, the first £5,000 of savings income is not taxed at all. This provides a useful income boost. In addition, where it is expected that a saver's total taxable income will be below the total of their personal allowance plus the £5,000 starting rate limit then they can register to receive their interest gross using a form R85, rather than having to first suffer income tax and then reclaim it.

The impact

This effectively means that in some cases in 2015/16 an individual with the right combination of income up to £15,500 may not be liable to any tax at all!

If total taxable income exceeds £15,500, but non savings income is less than £15,500, then part of their savings income will not be liable to tax.

An example to demonstrate

Felicity is 67 and receives annual pensions of £10,500 and has annual gross savings income of £4,000 (none of which is held in a tax free ISA). Her personal allowance for 2014/15 and 2015/16 is £10,500 as she is currently entitled to the higher frozen age allowance this tax year. Next year she will receive the same allowance as those under the age of 65. This means there is no tax on her pension income as it is covered by her personal allowance and her savings income will be taxed as follows:

2014/15 2015/16
The first £2,880 at 10% and the balance of £1,120 at 20% = £512 overall. There is no tax on the £4,000 savings income. A saving of £512!

If you would like to discuss whether this will affect your tax position please contact us for a review.

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