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Proposal to scrap the 10% tax rate on savings is just another kick in the teeth for savers
Back in June we published the Great Savings Tax Swindle, highlighting the complexity and unfairness associated with the 10% tax rate for savings income. We described how the system requires people on a low income to pay tax up to a year in advance that they do not owe, while higher rate tax payers are given generous credit terms.
In response to a Freedom of Information Request HMR&C told us that they estimated there were 3.47 million taxpayers with income tax liabilities on savings income arising at what is known as “the starting rate for savings”. HMR&C also revealed that 558,000 people had used their Self Assessment forms to take advantage of the 10% tax rate.
This means that almost 3 million people entitled to pay tax at the 10% rate end up paying 20% instead. The problem of low take up is not confined solely to the 10% tax rate. Many savers who should not pay any tax fail to complete the forms needed to have their interest paid gross. A parliamentary report published in 2010 estimated that over 2.4 million pensioners overpaid tax on their savings income by around £200m.
The act of saving itself should be sufficient as an opt-in to qualify for beneficial tax rates
We wrote to Mark Hoban, then Financial Secretary to the Treasury, explaining the issues and suggesting that the Government should stick to David Cameron’s pre-election promise to remove the basic rate of income tax from savings. This would eliminate all the costs and bureaucracy associated with the current ineffective system. Equally importantly, it would remove the barriers preventing people on lower incomes from receiving the full tax incentives to which they are entitled on their savings. We argued that the act of saving itself should be sufficient as an opt-in to qualify for these beneficial tax rates.
Proposal to scrap 10% tax rate for low income savers
Now, in a review of pensioner taxation, the Office of Tax Simplification (OTS) recommends that the 10% starting rate for savings be scrapped and the 20% rate applied instead. It is the role of the OTS to simplify the tax system; it should not be recommending increasing the tax burden for those on low incomes. If they really wanted to simplify the tax system, they would recommend scrapping taxing savings at source, which is the root cause of the problem. As an attempt at compensating for the loss of the 10% rate, the OTS recommends increasing the ISA limit. This is a distraction from the problem, not a solution.
ISAs are not the solution
There is very little built into the tax system to reward savers. It seems doubly unfortunate, therefore, that the rules designed to benefit those on low incomes – the 10% starting rate, the R85 form and the Cash ISA – all require opting in. Average savings rates have fallen by 60% since the start of the financial crisis. ISAs have been particularly badly hit; the average ISA rate in Sept 2008 was 4.52% and is now just 0.70%. That’s a fall of 85%.
The only differences between ISA and non-ISA savings, apart from the tax treatment, is paperwork and being tied in to a regulatory regime that restricts people’s ability to move their money. The TESSA, the forerunner to the ISA, provided tax-free savings as a reward for people tying their money up for five years; it was designed to encourage people to save for the long term. The tax exemption for an ISA is a reward for completing the bureaucracy.
As we said above, the act of saving itself should be sufficient as an opt-in to qualify for beneficial tax rates. Let’s scrap the bureaucracy, reduce the costs and do something to help people benefit from the fact that they have saved. We need to stop taxing savings at source, scrap basic rate tax on savings and create a simple and fair system to help people save.