Budget 2014 – Starting tax rate for savings

From 6 April 2015, the starting tax rate for savings will be reduced from 10% to zero, and the limit will be increased from £2,880 to £5,000.

This measure will benefit those people who have only savings income, and those who have savings and non-savings income if the total of their income is below £15,500, and to a lesser degree those whose total taxable income is above £15,500, but whose non-savings income is below £15,500.

Income is taxed in a specific order. Income other than savings or dividend income (such as pensions received or employment income) is taxed first. Savings income is taxed next, with dividend income taxed last. From 6 April 2015 the personal allowance will be £10,500 and the maximum amount of savings eligible for the nil rate will be £5,000. This gives a potential £15,500 tax free amount in total.

Thus, if an individual has only savings income, it will be tax free up to a maximum of £15,500. If the saver has employment income of, say £7,000, any savings income up to £8,500 (taking the total to £15,500) will be tax free. (Any savings income above the £8,500 will be taxable at the basic rate). If the individual has taxable non-savings income that is more than £15,500, the whole of his savings income will be taxable, and he will not benefit from the new measure.

The Treasury document Budget 2014 has a very effective illustrative example.

Until 6 April 2015, savings income, up to the current maximum, will continue to be taxed at 10%.