7.6 million Briton’s now spend a quarter of their income paying debts

Tax and savings changes: who’ll benefit the most?

Wednesday this week marked the beginning of the new tax year, bringing with it a raft of changes to taxes, savings and pensions.

The changes reflect announcements made in last year’s budget statement, and include tax relief for both lower and higher rate tax payers, along with benefits for savers amongst others.

But who is set to benefit the most from these changes?

Income tax changes

From the 6th April the income tax personal allowance (the amount of income that can be earned before paying income tax) increases from £10,600 to £11,000. In addition, the higher rate tax threshold (the level of income at which the tax rate increases to 40%) increases from £42,385 to £43,000.

These changes – which amount to tax cuts – are another stepping stone towards the Government’s aim of raising the personal tax allowance to £12,500 and the higher rate tax threshold to £50,000 by the end of this parliament.

While the increase in the personal allowance will provide a welcome boost to many households, only the country’s higher earners stand to benefit from the increase in the higher rate threshold. With less than one in seven employees paying the higher rate of tax, it is estimated that over three-quarters of this tax windfall will go to the richest 20% of households.

Those who stand to gain the least from the changes are the 4.6 million lowest paid workers in the country who don’t earn enough to pay any income tax, and who therefore won’t benefit at all from the changes.

New Personal Savings Allowance

From the 6th April most people who earn interest on a savings or current account will no longer have tax automatically deducted by their bank or building society. The changes mean that basic rate taxpayers will pay no tax on savings income up to £1,000 per year, and higher rate taxpayers will pay no tax on savings income up to £500.

According to the Government, the changes mean that 95% of people will no longer have to pay any tax on savings. This is good news for those who can afford to put money aside each month for saving.
But for the UK’s lowest earning households, this measure does nothing to help those who can’t currently afford to save.

Innovative Finance ISA

The new Innovative Finance ISA is expected to be available from today. The changes, which were announced in last summer’s Budget, make it possible to lend up to £15,240 a year through peer-to-peer platforms and receive interest free of tax.

While the biggest names in the peer-to-peer lending sector, such as Zopa, Ratesetter and Funding Circle, are still awaiting regulatory approval, the Financial Conduct Authority has granted permissions to eight much smaller lenders, including the ethical lender Abundance which launched its new ISA product today.

Supporters maintain that peer-to-peer lending provides opportunities to earn higher levels of interest than traditional ISA products and offers savers greater control over their money. However, some have warned that the higher returns come with a higher level of risk.

While the new Personal Savings Allowance and Innovative Finance ISA are good news for middle income earners that can already afford to put money away, these measures do little to help low earners who won’t even benefit from raising the lower income tax threshold.

Recent analysis by the Centre for Responsible Credit revealed that 3.2 million households – that’s 12% of all UK households affecting 7.6 million people – spend more than a quarter of their income on paying back their consumer debts.

The Chancellor’s concessions do little to tackle the main reasons that are preventing the UK’s lowest earners from saving each month.

By new economics.org – Economics As if People and the Planet Mattered

---