Think tank finds savers will be able to pocket £28,000 a year tax free

The Institute for Fiscal Studies (IFS) has said that clever savers may be able to take £28,000 a year in returns tax free under changes that take effect next month.

The IFS has said that those able to arrange their savings to take up to £1,000 of interest income, £5,000 of dividend income and £11,000 of capital gains could take out the sum entirely free of tax, if they also use their income tax personal allowance.

The report by the Institute also found that pensions will likely remain the most tax-efficient form of saving, although there have been suggestions that the tax-free lump sum could be eliminated after the budget.

Property will also remain an attractive form of saving, even with the changes announced last year, but buying a home to live in will represent a better investment than buy-to-let as the Government clamps down on tax relief for this sector.

The IFS found an annual charge of one per cent on funds could have the equivalent effect of charging basic-rate income tax on returns. Subsequently, a low-charge ISA may offer a better return than a high-charge pension for some people, despite the tax advantage associated with the latter.

Stuart Adam, one of the report’s authors said: “The last few years have seen radical changes announced to the taxation of savings.

“These will take millions of people’s savings out of the tax net altogether. Ideally people might make savings decisions based on the underlying risks and returns of different assets.

“But taxes and charges can significantly change the relative attractiveness of different savings options.

“If people are unsure about how taxes and charges might change, their decisions become even harder.”

Link: IFS report on saving incentives