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A super-sneaky personal tax-saving technique IR35 can't touch

It makes a pleasant change for us to announce a bona fide tax-saving technique, endorsed by The Chancellor himself. It centres around interest you pay on your personal savings account and it's available to all. However, it will be of significant benefit to contractors with cash on their hip.

Moreover, there's a super-sneaky way you can move to take advantage of it now, today. That's even though the law itself, the Personal Savings Allowance, doesn't kick in until April 2016.

Personal Savings Allowance: the thresholds

In George Osborne's new budget, he's announced thresholds for when taxpayers begin to pay tax on interest their savings. For higher-rate taxpayers, the first £500 they earn from April next year will be tax-free. For basic-rate taxpayer, it's double that.

You may have to read that twice for the gravity to sink in. I know I did. It's not that you start paying interest after you've deposited your first £1,000/£500. That would hardly be newsworthy.

You don't pay tax on the interest your savings have earned until you reach those ceilings.

Which accounts qualify for Personal Savings Allowance?

The types of personal savings accounts this move applies to stretches across the board. Maybe you're saving for retirement. If you bought Pensioner Bonds from NS&I that don't mature until after April 6th 2015, you'll get the full benefit upon maturity.

And this is where it gets interesting. The best personal savings accounts available today are those that pay interest annually, not monthly. That is, assuming that the next interest payment falls after the law comes into force in April next year. If your 'anniversary' falls between now and then, you'll have to stomach the 20% deduction this year.

Accounts that pay interest once every twelve months do tend to offer a slightly better interest rate as a matter of course. But at this moment in time, any maturing after the Personal Saving Allowance comes into force have a huge advantage over those that pay monthly interest.

If your bank pays savings interest once a month between now and next April, you'll pay tax on every pound of interest you earn. If you don't plan on saving more than £15,240 this year, you'll be better off with an ISA.

How does the new saving allowance stack up against an ISA?

Up until two years ago, contractors and freelancers really did have an advantage with ISAs. As the mechanism used to allow half cash and half dividend to make up to the full allowance, the latter half wasn't much use to 'permies'. Limited company contractors could draw dividends to make up the balance and claim the full annual entitlement.

Now that the full entitlement - £15,240 this tax year - can be made up all cash, limited company shareholders have lost a competitive edge.

That's not to say ISAs aren't worth it. Their base interest rate is often much higher than a personal savings account.

Taking the two products, ISAs and the new Personal Savings Allowance, there's great scope to earn tax-free interest. An article in the Telegraph implies that higher-rate taxpayers would need to save almost £35.5k before tax on their interest kicked in on a Virgin easy-access savings account.

Coupled with an ISA ceiling in excess of £15k, that's over £50,000 you can deposit as savings this year, earn interest upon and not pay tax on your earnings. Better than having your tooth pulled, eh?


image: Serge Bertasius Photography at freedigitalphotos.net