George Osborne announced scrapping income tax paid on interest from regular high street accounts . The Chancellor heralded a savings revolution yesterday by scrapping income tax paid on interest from regular high street accounts. In a major move to counter the effects of years of historically low interest rates, he announced a new personal savings allowance that will make ordinary accounts tax-free for 95 per cent of the population. It means a basic rate taxpayer can earn £1,000 in savings interest without paying tax. A higher rate taxpayer will be able to earn £500. At current rates, a basic rate taxpayer would need to have more than £70,000 in an average account to go over the new £1,000 allowance. By stopping tax on savings the Chancellor has effectively handed a 20 per cent boost to the rates earned by most savers in the UK. The Revenue estimates that the allowance will benefit some 28 million savers. The way savings are taxed is currently riddled with complications. Every year someone can pay in £15,000 to a cash Isa where interest is paid tax-free. But on a standard high street savings account, interest is taxed at the saver’s normal rate of income tax. This tax is automatically deducted by a bank and building society before the interest is paid, and passed directly to HM Revenue & Customs. Higher earners paying 40 per cent or 45 per cent income tax are supposed to declare the interest they receive on a self-assessment form. Lower earners who do not pay income tax can fill in a form to stop the tax being deducted. These deductions mean that someone with £20,000 in a high street savings account paying 2 per cent would earn only £320 a year interest if they were a basic rate taxpayer. A higher rate tax payer would earn £240 and a top rate taxpayer £220. If the interest was untaxed the saver would earn £400. In addition to this, those with total income below £15,600 a year can apply to have their savings interest paid tax-free. Every year thousands of pensioners who can claim tax-free interest on their savings miss out on this perk because they do not realise they qualify. It means a basic rate taxpayer can earn £1,000 in savings interest without paying tax, while a higher rate taxpayer will be able to earn £500 . Figures from HM Revenue & Customs suggest around £1.8billion a year is received a year in savings interest tax. George Osborne said Britain will be back in the black before the end of the decade – as he shot down Labour’s claims that he is taking the country back to the 1930s. The Chancellor outlined plans to bank a surplus of £5.2billion in 2018-19 – the first since 2001 – as he hailed a UK ‘that is growing, creating jobs and paying its way’. He said the national debt will start to fall as a percentage of national income next year, having risen consistently since 2001. ‘Those 13 years amount to the longest year-on-year rise in our national debt since the end of the 17th century,’ he said. ‘Today we bring that record to an end.’ The Chancellor announced that state spending will fall to 36 per cent of national income in 2019-20 – marginally above the 35.9 per cent it reached in 1999-2000. He had previously planned to slash spending to 35.2 per cent of national income – the lowest level since the 1930s. But Mr Osborne said the reality was that the state will now return to a size last seen under the previous Labour government ‘before spending got out of control’. Two years ago, Britain’s building societies called for the Government to scrap all tax on savings to remove this complexity. Yesterday the Chancellor revealed his major overhaul. His introduction of a personal savings allowance means that from April 2016 those who earn below £16,800 a year won’t have to pay any tax on savings interest. Meanwhile, anyone earning below £42,700 – the point at which higher rate tax starts – will be allowed to have £1,000 in savings interest tax free. Those with earnings from £42,701 to £150,000 will have a £500 allowance. Anyone earning more than this, and paying the 45 per cent tax band, has to pay tax on their savings interest. The Buildings Society Association has welcomed the move. A spokesman said: ‘This is great news for savers. We are delighted to get rid of the complicated tax system on savings.’ Anna Bowes, director of analysts Savings Champion, said: ‘It feels like interest rates on savings accounts have been falling for ever, and so this effectively gives them a 20 per cent boost to a basic rate taxpayer. ‘It makes regular savings accounts as competitive as tax-free cash Isas, and the change is likely to force a serious change in the way people save.’ Maike Currie, director at investment firm Fidelity, said: ‘This allowance will eradicate the double taxation most people currently experience, where they pay tax on their wages and tax again on the interest from their savings. However, it does little to deal with the paltry interest rates currently on offer to savers.’ Thumbs up: Ivan and Clair Palmer - with Maxwell, four, and Zachery, two - welcomed the tax-free boost . Ivan Palmer, 36, and his wife, Clair, 41, have more than £45,000 in savings. They described yesterday’s announcement that the first £1,000 in interest on savings will be tax-free from April 2016 as ‘fantastic news’. It means they will keep all of the interest they earn on their savings. Mr Palmer earns £42,000 as a Nottinghamshire teacher, while his wife is a stay-at-home mother. They are keen savers and put a lot of money aside after Mrs Palmer was made redundant from her job, where she earned £75,000. They have £10,000 in a high-rate savings account, £20,000 in a current account and £15,000 in an Isa. They also put £200 per month in a regular saver for their children, four-year-old Maxwell and two-year-old Zachery. Mr Palmer said: ‘This is fantastic news for us. Interest rates are so low that it’s really hard to save money, so any helping hand to make saving more worthwhile is going to be beneficial. ‘We earned £150 on our Isa last year, so for us to see our savings income be protected from tax really gets the thumbs up.’ Flexibility to dip in and out of your Isas . By Victoria Bischoff, Money Mail Reporter . Plans to introduce smart cash machines which allow customers to pay in as well as withdraw cash could lead to bank branch closures, experts warned last night. Budget documents yesterday revealed plans to develop new ATMs that will offer a range of services currently only available inside branches. As well as taking out money and getting balance statements, people will be able to deposit cash and cheques. These machines already exist in many branches to cut down queues, but are only available to customers of that bank. It is thought the new machines could allow customers of any bank to use them. However Derek French, director of the Campaign for Community Banking, said: ‘These will lead to the closure of more branches.’ Last year 479 bank branches shut – more than double the number that closed the year before. Savers will able to dip in and out of their Isa without using up their vital annual allowance, the Chancellor has announced. Currently, everyone can pay £15,000 a year in to an Isa – which is rising to £15,240 from April 6. Isas are hugely popular with savers as they allow them to earn interest without paying tax. Around 10.5 million were opened last year. But at present, once savers have invested their full allowance, that’s it. Should they need to make any emergency withdrawals during the year they are not then allowed to later put any extra cash back in to replenish their account. Many savers find this a huge inconvenience as it means their one-off allowance disappears if they suddenly need to get money out in arush. So the Treasury plans to overhaul the rules in the autumn. From then, savers will be able to pay £15,240 in to an Isa and then, for example, withdraw £2,000. Should they get another £2,000 later in the year they will then be able to put this back in to their account to top up back up to the maximum allowance. It is the latest change to Isas which were given an overhaul at the last Budget. Then the Chancellor increased the annual allowance to £15,000, and said savers would be allowed to move between cash and shares. Investors in stocks and shares Isas will not benefit from the new rule. George Osborne said the Government would offload £11billion of mortgages the State was left holding . The sale of bank assets taken on by the Government during the financial crisis will raise £20billion to pay down the national debt, the Chancellor said. The Treasury plans to sell at least £9billion worth of shares in Lloyds Banking Group in the coming year as it reduces its stake in the bailed-out lender. Mr Osborne said the Government would also offload £11billion of mortgages the State was left holding following the rescue of Northern Rock and Bradford and Bingley. ‘The last government put taxpayers’ money into the banks – this government is getting it back,’ he said. Mr Osborne said it would be ‘deeply irresponsible’ to treat the cash as a ‘windfall’ that could be spent ahead of May’s election. He added that it would involve ‘spending money we didn’t really have’ and ‘racking up borrowing our country couldn’t afford’. ‘We’d be repeating all the mistakes the last government made instead of fixing those mistakes,’ he said. Instead the money raised from the sales – as well as savings from lower welfare bills and debt interest payments – will be used to pay down the national debt.
Basic rate taxpayer can earn £1,000 in savings interest without paying tax . Current rates requires more than £70,000 to go over the new allowance . Chancellor has handed 20% boost to rates earned by most savers in UK . The Palmers from Nottinghamshire say the announcement is 'fantastic'
It will mean they can to keep all of the interest on their £45,000 savings .