The tax breaks that boost your monthly income

SAVERS hunting for an account that pays them a monthly income will earn just 1.5 pc, even if they have substantial sums tucked away.

these low rates on monthly income mean that anyone who wants to take regular interest has to work a little harder to make sure they earn as much as possible.

one way they can do this is to make sure they use all the tax breaks available to them.

normally when you earn interest on a savings account, all of your income is taxed at 20 pc. But that doesn’t mean you have to pay this tax.

in fact, lower earners can pay no tax on savings income up to £15,600.

new rules for this tax year mean that you will not pay tax on your first £5,000 of interest from your savings — as long as your overall income is less than £15,600.

to work out whether you have to pay tax, deduct your non-savings income (such as your pension or income from work) from your personal allowance. this is £10,600 for this tax year and a slightly higher £10,660 if you were born before April 6, 1938.

Any personal allowance left over can be used to offset your savings income. Above £10,600, any income can be set against the £ 5,000 band tax- f ree savings allowance you get.

So, if you have non-savings i ncome of £10,000 a nd additional income from savings of £5,600, you won’t pay tax.

to claim the extra £5,000 allowance, fill in form R85, available from your bank or building society, so your interest is paid automatically before tax.

Make sure you use the whole of your cash isa each tax year — £15,240 for this tax year. then your interest is automatically tax- f ree and doesn’t count towards your total i ncome f or purposes of tax.

top rates on accounts that are prepared to pay out i nterest each month — and not many do — include Barclays instant Cash isa issue 1.

it pays 1.28 pc on balances up to £15,000, rising to 1.38 pc for up to £30,000 and 1.48 pc if you have £30,000 or more in the account.

With t he new Skipton Limited Edition Cash isa, you can earn a higher 1.59 pc if you are willing to run your account online.

At Virgin Money, the rate is 1.4 pc, as long as you don’t draw on your capital more than three times a year.

Skipton BS pays 1.49 pc through its branches, but be ready to move after a year because the rate includes a 0.49 point bonus payable for the first 12 months.

if you tie up your money for a year, you can earn a fixed 1.64 pc with Virgin Money and Aldermore Bank. For two years, kent Reliance and Aldermore pay 1.83 pc. the rest will have to stay in taxable accounts.

Yo u can, however, make use of the new £5,000 allowance on your interest earned from taxable accounts. Among the best deals f or easy- access money is national Savings & investments income Bonds at 0.99 pc after tax ( 1.24 pc before) and, unlike interest f rom banks and building societies, it is paid automatically before tax. on fixed-rate deals, newcomer Charter Saving Bank pays 1.58 pc (1.98 pc) on its online account for a year, or 1.74 pc (2.18 pc) for two years.

in the High Street, Virgin Money pays 1.23 pc (1.54 pc) for one year, while best deals for two years include Skipton BS at 1.39 pc (1.74 pc).

if you are aged 65 or over and can forgo monthly income, you can earn 2.24 pc (2.8 pc) over one year with national Savings & investments.

those hoping for respite against poor rates shouldn’t be too optimistic. Experts predict rates will stay low.

Samuel tombs, Uk economist at Capital Economics, says: ‘We could see a rate rise later this year, but it will be small, at 0.25 pc.’

He expects base rate to be at 1.25 pc at the end of next year.

Scott Corfe, of the Centre for Economics and Business Research, predicts the first rate rise in February next year — but, once again, by just 0.25 pc, with the norm at around 2 pc after a series of small rises.