The first £1,000 of interest earned on savings will be completely tax-free for lower earners from next year. Announcing the news during his Budget speech, Chancellor, George Osborne, said:

“People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it.”

The move – an appeal to savers who have suffered from historic low interest rates in recent years – brings in the new allowance from April 2016. It is expected to take 95% of all taxpayers out of savings tax altogether. This estimate also seems to confirm that 95% of us don’t have vast savings pots generating more than £1,000 of interest a year! A saver would need to have £50,000 in an account paying 2% to generate interest of £1,000 (gross) a year, so perhaps it’s time we all started putting a bit more away each month!

Basic-rate taxpayers will be eligible for the full £1,000, while higher-rate taxpayers – those who earn between £42,701 and £150,000 – will qualify for a £500 allowance.

Paul Whitlock, director of savings at Charter Savings Bank, said:

“It’s fantastic to hear tax has been slashed from savings for up to 17 million people in today’s Budget. The news is especially sweet for those on lower incomes and pensioners, who look set to benefit the most. Overall, the announcement should help encourage people to save more.”

However, Whitlock also added that historically low interest rates continue to have a major impact on some people’s incomes and the new savings personal allowance would not help them in the long-term. He explained:

”While the Chancellor’s cut in tax on savings can be seen as a short term crowd pleaser, only long term changes to interest rates will truly shape up our nation’s savings culture. As it stands, consumers are still not receiving the returns they crave on their cash, especially from the big six who continue to offer poor returns for their customers. Osborne’s heart is in the right place when he says he wants to build the economy on savings, but in reality this can’t happen until interest rates rise.”