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Savers face tax hit as income tax and pension changes bite

Savers planning to take advantage of the new nil tax rate on savings income could be hit with higher-than-expected tax bills following the pension freedoms, experts warn.

From April this year the starting tax rate on the first £5,000 of savings income will drop from 10 per cent to nil, at the same time as the pension freedoms allow savers to make ad-hoc withdrawals from their pots.

As a result of the tax changes, someone could earn £15,600 from pensions, earned income and savings income such as bank interest and pay no tax at all.

But taking even a small withdrawal of taxable pension could push savings income out of the tax-free zone, leaving savers with an effective charge of up to 40 per cent, Taxbriefs editorial director Danby Bloch warns.

AJ Bell head of platform technical Mike Morrison says: “It’s a quirk of the tax system that if you’re on low earnings you get the differential between earnings tax and savings tax and could get hit.

“Luckily it won’t affect many people but it’s those kinds of people who will be going to Pension Wise, rather than an adviser. Yet unfortunately it’s probably beyond the expertise of many of the guidance staff.”

Landmark Financial Solutions managing director Colin Jelley says: “This has always been the problem with the starting rate of tax on savings. The fact is it’s bought into more focus now because of the pension freedoms. Part of the problem is that it’s presented as a nil rate but for a reasonable part of the population it won’t be.”

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