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Ch-ch-changes to personal finance for the new tax year

There are a few important changes to personal finance that have come in to operation on 6th April 2016 that you may well be able to take advantage of. It is worth looking at the options and doing the number-crunching to work out what’s best for you.

Personal Savings Allowance (or PSA)
The first is a tax-free interest income allowance or Personal Savings Allowance: most UK adults will be able to earn up to £1000 interest a year without paying tax on it. This is a significant shake up and will take 95% of savers out of paying tax on their savings.

The Personal Savings Allowance works like this. If you are a basic (or 20%) tax payer, you will be allowed to earn up to £1,000 interest tax-free. If you are a higher rate (or 40%) tax payer, you will be able to earn up to £500 tax-free. The savings allowance will not apply to top rate (or 45% and above) tax payers. To clarify, you need to be earning less than £43,000 a year to be eligible for the £1000 tax-free Personal Savings Allowance and between £43,000 and £150,000 to earn up to £500 tax-free.

But it isn’t just interest on savings accounts that count – it’s on any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, fixed-rate company bonds, income from government bonds or guilts, interest distributions (but not dividend distributions), most types of life annuity payments, and interest on peer-to-peer accounts. For more information, see here.

PSAs and positive investing
For positive investors, it is worth noting that all Community Benefit Societies and some Co-operatives pay distributions in the form of interest. This means that the Personal Savings Allowance applies to a large number of the savings and investment products listed on the Ethex platform.

The tax-free Personal Savings Allowance for lower rate tax payers is the equivalent to the interest earned on almost £75,000 in a top easy-access savings accounts. But you could use part of your allowance to invest in a Community Benefit Society offer or bond (charity or community). To assess how much of your PSA you might like to use in this way you should bear in mind the FCA guidance that investors can invest up to, but no more than, 10% of your net investible assets into unlisted products in any year (note: withdrawable shares are not included in the 10% calculation).

There are currently a wide range of products that fit the bill listed on the Ethex platform, including Southill Community Energy, Stockwood Community Benefit Society, London Community Land Trust, Wight Community Energy, Bristol Energy Co-operative, Golden Lane Housing, Greenwich Leisure, Westmill Solar Co-operative – and they offer rates above many savings accounts.

PSAs and interest income – no longer taxed at source
It is worth noting that your interest income from savings accounts will no longer be taxed at source (ie. your bank won’t take off 20% from your savings as they do now) and the onus will be on you to pay the tax due on interest on your savings if it falls outside the allowance. For investors in a Co-operative or a Community Benefit Society interest is paid gross so you will now only need to declare this as income if your total interest income is above £1,000. And, interest already earned in tax-free accounts – like ISAs and Premium Bond winnings – don’t count towards your Personal Savings Allowance limit. For more information, see here


Tax-free Dividend Allowance
The second change is that the Dividend Tax Credit has also been replaced by a new tax-free dividend allowance. This means that you won't have to pay tax on the first £5000 of your dividend income, no matter what non-dividend income you have. You'll pay tax on any dividends you receive over £5000 at the following rates: 7.5% on dividend income within the basic rate band; 32.5% on dividend income within the higher rate band; and 38.1% on dividend income within additional rate band.This simpler system will mean that only those with significant dividend income will pay more tax. If you're an investor with modest income from shares, you'll see either a tax or no change in the amount of tax you owe.

Innovative Finance ISA or IFISA
The third change for savers is the new Innovative Finance ISA or IFISA. Going back to basics – an ISA (or Individual Savings Account) is a tax-advantaged savings account within which any interest, dividends or capital gains are tax-free for the investor. In other words, it puts a tax-free “wrapper” around your savings and investments so you can receive interest without paying tax. There are currently two types of ISA: a cash ISA and a stocks and shares ISA. The annual limit for 2015–16 is £15,240, which can be held in both types of ISA, or a combination of the two.

However, from 6th April 2016, a third ISA has been introduced, called an Innovative Finance ISA or IFISA, which means taxpayers will be able to hold savings in three types of ISA. The “innovative” bit is that you can now hold FCA-regulated peer-to-peer loans in this new ISA. This is well explained in this Youtube video here. It is possible that this will be extended to bonds and equity but this is still under consultation and will only apply to FCA-regulated products. With higher levels of interest for peer-to-peer lending, IFISAs are likely to move money away from the more established high street bank options to newer finance options, such as peer-to-peer platforms Zopa, Funding Circle and Ratesetter. Note. At time of writing, all are still waiting for approval from the FCA. However, you can set up a approved IFISA with renewable energy platform Abundance Investment with cash that you can then use to invest in debentures once the rules on crowded funded debt are finalised. Note: IFISA investments will not be covered by the FCA compensation scheme.

Do the number-crunching
It would be easy to conclude that the change to the Personal Savings Allowance will be the death of ISAs as savers will automatically get interest tax free. But for those that have high value savings pots, ISAs might still offer an advantage. The value in ISAs comes over time as they are protected from tax year after year so you can gradually protect more and more. However, if you are a basic rate tax-payer with a smaller pot, the PSA might be the best option, especially if you include higher-earning investments in co-ops and BENCOMs . Whatever, it is worth crunching the numbers to figure out which is the better option for you. And, don’t forget to check out the products listed on Ethex!

See a complete list of Ethex products here

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