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The tax-free Personal Savings Allowance (PSA) was introduced in April, meaning you can now earn tax-free interest not only from ISAs but from savings accounts and current accounts too. But what are the tax implications for current account rewards such as cashback and switching bonuses?
Here are the facts when it comes to income tax on everything from interest to cashback to reward payments.What comes under the Personal Savings Allowance?
Since April 2016, basic rate taxpayers have been allowed to earn up to pound;1,000 in savings income tax-free, while higher-rate taxpayers get a pound;500 allowance. This is all on top of the annual ISA allowance.
But HMRC says not all payments made by banks and building societies are savings income, so would not necessarily fall under the Personal Savings Allowance.
According to HMRC guidance, if you receive annual payments that are non-interest then the basic rate tax will be deducted at source. If an individual is not liable to tax they can reclaim any tax deducted by completing an R40 form or on their self-assessment tax return.
If you are a higher-rate taxpayer you would need to pay the extra amount through your tax return.
An HMRC spokesman told us: In general HMRC would only expect the payments to be annual payments if they can continue for more than a year and the customer does not pay a fee for holding the account.
This means that one-off payments or monthly payments that last less than a year are not annual payments. Because annual payments are not covered by the PSA, banks and building societies will continue to pay them with basic tax deducted.
But even if your rewards are not annual, you could still be taxed if you get monthly cash rewards as these may fall under the HMRC definition of miscellaneous payments.
This creates more admin and confusion as miscellaneous payments dont have tax automatically deducted, so basic and higher rate taxpayers would have to disclose this on a self-assessment form.
So which products are really tax-free?Savings accounts
Lets start with a relatively straightforward one. All savings interest up to pound;1,000 for basic rate taxpayers and pound;500 on the higher rate falls under the PSA. Anyone earning above the threshold would need to complete a self-assessment tax return.Current accounts
Any interest you earn on current accounts would come under the PSA.
So for example you could open TSBs Classic Plus Account paying 5% on balances up to pound;2,000, or a Santander 123 Current Account and get up to 3% on balances between pound;3,000 and pound;20,000 tax-free as long as your income from all bank accounts is below the Personal Savings Allowance.
Several banks and building societies offer cash incentives for people switching their accounts. This is considered a discount so wouldnt be taxed, according to Moneyfacts.
Additionally, some providers will offer you cashback or rewards on certain types of spend. As these are also classified as a discount they arent taxed.
It gets confusing when a current account makes regular cash payments as these can be treated as annual or miscellaneous payments, so they would be subject to tax. For example, Halifax offers a well-publicised pound;5 reward on its Reward Current Account for each month you have two direct debits set up and pay in a minimum of pound;750 or more.
The reward is actually worth pound;6.25 a month, its just that the taxman has already taken a 20% cut before it arrives in your account.
Barclays has a similar offer on its Blue Rewards Current Account, except the taxmans cut has not yet been taken.
Customers can receive certain monthly monetary awards such as pound;7 for banking regularly and up to pound;3 a month for taking out its own protection products.
The pound;7 is liable for income tax, meaning you only actually get pound;5.60 a month. Strangely, the other rewards are not subject to income tax.
Ultimately you will need to check the terms and conditions of the current account, just to be 100% sure.
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Nearly everyone could use a financial do-over. Bankrate asked Americans about their biggest money regrets, and they unsurprisingly centered on savings.
About 4 in 10 Americans expressed regrets about failing at some kind of saving -- for retirement, for emergency expenses or for their childrens education.
There is an upside here, though. The fact that people are expressing regret about these decisions would seem to suggest that they recognize their mistake and have learned something from the experience.Learning from my expensive mistakes
I can relate. I would say that to the extent I am responsible about saving today, its because I still remember vividly the mistakes I made in the past. In particular, there was one Christmas in college where I spent every last dime of my savings on presents for my family. After all, I had a job, I had some money and it was time to get something nice for everybody, for once.
All went as planned. Everyone was really happy with the gifts I gave them, I had a great Christmas vacation, and I made it safely back to school. Everything was going great -- until I checked my checking account balance at an ATM and saw I was $400 overdrawn. Some of my presents, as well as my travel expenses back to school, had all hit the account at once and triggered a cascade of $30-something overdraft charges.
On top of that, I had no savings to fall back on, and my next paycheck wasnt due for a week. I had no food and little gas. Thankfully, my girlfriend at the time (now my wife), was kind enough to buy me some groceries. But it was a powerful lesson on the necessity of keeping an emergency fund that I will never forget. (My new colleague Sarah Berger has a story about her own emergency fund lesson).Regret-driven savings?
It appears were not alone -- looking at historical data on the personal savings rate, it looks like millions of Americans had similar experiences during the Great Recession, when many found themselves unexpectedly jobless with little or no savings to fall back on.
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I only just fall into the higher-rate tax band, and so receive a £500 personal savings allowance, but I have substantial interest earnings so would benefit greatly from the ful l £1,00 0 allowance. Could I make additional pension contributions via salary sacrifice to bring myself down to basic-rate taxpayer status, and therefore be eligible for a £1,000 personal savings allowance? Also, can savings income itself push you into the higher-rate tax bracket and reduce your allowance to £500? SW, via email
The boundaries between tax brackets and the implications involved in crossing them are complicated, even more so now that the personal savings allowance has been introduced.
The hard cut-off, which distinguishes whether an individual receives a £500 allowance or a £1,000 allowance, means that many hovering perilously close to the boundary are keen to make sure they don't breach it.
Making additional contributions to a company pension via salary sacrifice is one way to go about it.
Tina Riches, national tax partner at accountancy firm Smith amp; Williamson, explained: "The restrictions to the level of personal savings allowance are based on 'adjusted net income', which is taxable income, before taking into account personal allowances and certain tax reliefs. The main reliefs that can be deducted include trading losses, charitable donations made under Gift Aid and pension contributions."
In other words, a pension contribution made via salary sacrifice is never included as taxable income, so it doesn't count towards the personal savings allowance. That means you could keep yourself in the basic-rate bracket by increasing your salary sacrifice pension contributions.
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This is the third installment in a series of planned articles designed to initiate coverage on a handful of new biotech names. For those interested in the name, it provides a brief introduction and history of Bluebird Bio (NASDAQ:BLUE), a once high flying biotech that got its wings clipped due to early trial results that fell short of extremely optimistic expectations.
Admittedly, I am a self-professed biotech bull. In fact, I think the next couple of decades could be a golden era for biotech driven by an aging population and medical innovation. As US investors adjust to the new normal of weak wage growth, low productivity, low inflation, and increased personal savings, the stock market could continue to stagnate. However, I view biotech as a sector where alpha can still be achieved. As a result, I advocate being overweight in the sector as part of a diversified portfolio strategy.
Bluebird operates in one of those new, innovative areas of biotech, namely genetic diseases and T cell-based immunotherapies. Even after a year long decline in stock price, Bluebird, an early, developmental stage biotech, still has a market cap measured in the billions, which speaks to the potential of the therapy.
Bluebirds Innovative Approach
Bluebirds approach to gene therapy is based on viral vectors that utilize the Human Immunodeficiency Virus Type 1 or HIV-1. The HIV-1 vector has been stripped of all the components that allow it to self-replicate and infect additional cells. HIV-1 is part of the lentivirus family of viruses. As a result, Bluebird refers to its vectors as lentiviral vectors.
The vectors are used to introduce a modified copy of a gene from the patients own blood stem cells called hematopoietic stem cells or HSCs, which reside in the patients bone marrow. The HSCs are dividing cells that allow for sustained expression of the modified gene.
The gene therapy platform is being used for severe genetic and rare diseases and in oncology. In Bluebirds own words, the therapy is based on a simple notion; to genetically modify a patients own cells to fundamentally correct or address the genetic basis underlying a disease.
Bluebirds pipeline of therapies based on its genetic modification techniques and lentivirus approach is provided below:
Click to enlarge
A Tail Of Two Trends
During the twelve month period from May 2014 to May 2015 Bluebird share price appreciated over 800%. It represents a period of progressively positive developments for the company. In May 2015 Bluebird reached its peak at $194 a share. Since that time, however, the stock has been in steady decline. To illustrate the point, below is a two year chart.
What went wrong?
Bluebird Falls Short Of Sky High Expectations
Rewind to approximately two years ago. Bluebird was planning to present beta-thalassemia data at a conference in June 2014. Beta-thalassemia patients suffer from chronic anemia and require regular blood transfusions. Results were a huge success. The data presented indicated that after a single infusion of Bluebirds gene therapy, the two beta-thalassemia patients started producing functional hemoglobin and were able to halt blood transfusions. Even though it was only two patients, the future looked bright for Bluebird and its shareholders and expectations were sky high. The following day, the stock was up 54% in pre-market.
Assuming continued success, market potential for the therapy was huge. Analysts were estimating cost of therapy at $1 million per patient. Based on patients with the disease, reasonable estimates for revenue for the company ranged from several billion to tens of billions.
An abstract released in November 2014 ahead of the American Society of Hematology annual meeting indicated that a third beta-thalassemia patient was responding more slowly compared to the first two patients. However, analysts at the time defended the results as being too early to pass judgment.
Bluebird was back on track in December 2014 after reporting 4 of the 7 patients with beta-thalasssemia were responding exceptionally well to the treatment. Adam Feuerstein, a Senior Columnist at TheStreet, wrote the following:
Four of the patients -- all followed for longer than three months -- are producing enough oxygen-carrying hemoglobin on their own to eliminate the need for chronic blood transfusions.
Two of these super-responding beta-thalassemia patients -- followed for a year and nine months, respectively -- have hemoglobin levels of healthy adults. At this point, a single infusion of Bluebirds gene therapy has essentially cured them of this serious, inherited blood disease.
The remaining three patients not mentioned were infused only a month prior, which was too early to give results. But with the patients reported, already high expectations of success were elevated even further as Bluebird entered 2015.
In February 2015 Bluebird received FDA breakthrough therapy designation for Lentiglobin in beta-thalassemia.
In May 2015 there was more positive news the therapy was working but this time in sickle cell disease. At the European Hematology Association annual meeting Bluebird once again presented results that were exceptional. After four and a half months of follow up, the sickle cell patients total anti-sickling hemoglobin was 31.6%, and he hadnt been re-hospitalized for a sickle-cell related event since being treated. Importantly, the patient had continued to improve over the four month period.
After the data was presented, investors were declaring victory over sickle cell disease. But, it was only one patient!
Bluebird Reverses Course
Finally, after a year of positives where Bluebird could do no wrong, bad news struck in June 2015. An advisory panel recommended Bluebird Bio delay the start of its clinical trial in children with beta-thalassemia for one to two years until more safety data was obtained. It was an end to Bluebirds year long winning streak and would prove to be a defining moment in the stock price.
By August 2015 Bluebird appeared to be swept into the downdraft of the overall biotech sector as reflected in the IBB graph below.
By September 2015 insiders were unloading shares. Further evidence of Bluebirds reversal of fortunes.
October 2015 brought further bad news. Bluebird reported a patient treated with a first-generation version of its gene therapy suffered a relapse seven years later. It was the first sign of cracks in the 100% cured camp but it would not be the last.
In November 2015 Bluebird reported that three beta-thalassemia patients with a more severe genetic mutation had not been cured and at least six months out from treatment still required blood transfusions, but at a reduced level.
By December 2015 Bluebird had narrowed down the impact of treatment to various genotypes as the slide below indicates.
Click to enlarge
At the same conference, Bluebird reported two sickle cell patients infused with Bluebirds gene therapy only producing small quantities of normal-functioning red blood cells which were insufficient to impact their disease. A third patient was too early after treatment but appeared to also show signs of slow improvement.
In March of this year, Bluebird reported promising early results in treatment of cerebral adrenoleukodystrophy, or CALD. CALD is a genetic disease inherited through a defective X chromosome carried by the mother. CALD causes the destruction of a protective sheath around nerves cells in the brain which results in problems with thinking and muscle control. Over time patients lose the ability to think, move, see and speak and eventually become comatose and die. Its a very rare disease. Seventeen boys with CALD were enrolled into the study. Three had completed the endpoint of 2 years with no signs of major functional disabilities (the primary outcome). The remaining fourteen boys were also free of major functional disabilities but had not yet reached the two year mark. Results were very promising but also very preliminary.
That pretty much brings Bluebird up to date. The company doesnt plan to share additional data on beta-thalassemia and sickle cell patients until ASH later in the year. Clearly the stock got ahead of itself. Investors bid up the stock price over a twelve month period to unsustainable levels based on early success with just a few patients resulting in a multi-billion dollar valuation for Bluebird.
However, as a new investor looking at the company with fresh eyes, I see considerable promise. Sentiment is at an all time low. Its still an early stage developmental biotech with a billion dollar market cap. But, at these levels with promising results to date, Im a buyer.
Its probably not going to cure sickle cell disease or beta-thalassemia, but with the right genotype, it could offer a cure for specific patients who were previously incurable. If analysts are correct about price per treatment, returns could be tremendous. With encouraging data presented later in the year, Bluebird could once again soar!