Proposal to scrap the 10% tax rate on savings is just another kick in the teeth for savers

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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.

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6 Comments

1. John.

   January 31, 2013 at 5:41 pm

   Here’s a simplification…

   scrap the damned taxation on savings income altogether since it is taken away from money that has generally been taxed at source once already, or at least it has for the great unwashed masses being used to carry and ultimately pay off the banksters debts for them.

   Recommend (13)
2. Anne

   February 1, 2013 at 2:53 pm

   The Government and its hangers-on are always looking to further their assets,no matter how corrupt or crippling to the man in the street i.e the public slave.

   The OTS (Office for Tax Simplification) is just another rogue office. And compensation in the way of increasing the amount of money that can be deposited in an ISA during the year,is nothing but a `false runner` for the reason that most of us,due to the quango of QE and the devalued pound sterling and high inflation,no longer have any money to put in to an ISA.

   The Government ,the Chancellor and the Bank of England,still don`t get it. If people have no money in their pockets,the economy cannot grow. They are unbelievably DEAF.

   Recommend (12)
3. helen

   February 2, 2013 at 2:08 pm

   The entire lot of them are deaf dumb and blind to the plight of Pensioners who have done the right thing and saved out of TAXED income because there was no pension scheme avalable to join

   The effects of 0.5% Bank Rate
   QE
   FLS
   removal of Age Allowance
   and now removing 10% tax on savings income proves they hate us with a passion
   MPs are demanding a 32% increase in their salaries yet we are told CPI is a more suitable index for us

   Well sorry if the MPs think they deserve 32% we deserve DOUBLE that

   We have done the right thing and cared for our children
   our sick partners
   our elderly parents

   and we are being PUNISHED for saving

   Its simply beyond reason and its a disgusting way for any country to behave

   Far better to be an illegal immigrant or feckless , workshy or a deliberately single mother because then you simply get it all put in your hand

   Recommend (14)
4. Paul

   February 3, 2013 at 10:33 am

   I agree with the posts above.

   This awful coalition is screwing Savers and Pensioners as is the BOE.

   They could help Savers for now by giving gross interest to make up some of the losses they are having with low rates.

   They could recover the interest the Liar’s Loans borrowers have benefited from.

   Rajoy, the Spanish Prime Minister has recently been accused of taking bungs along with his Government pals. In no time at all an online petition with over 750,000 names has been formed.

   A similar petition needs to be formed for Savers and Pensioners Groups threatening to abstain from voting at next GE or to vote UKIP, it’s the only way the Conservatives will listen to us.

   Recommend (8)
5. Geoffrey

   February 6, 2013 at 10:12 am

   There used to be a special tax rate for building society interest, and when that was scrapped, the 10% rate was introduced by way of compensation. So if it gets replaced with 20%, it would be just another disgraceful stealth increase.

   There is no doubt that with rates where they are now, savings shouldn’t be taxed at all, or if the must continue to screw every last drop out of savers, it should be a flat rate of 10%.

   Recommend (4)
6. frances

   February 17, 2013 at 1:12 pm

   The person who wrote the report recomending removing the 10% tax band really is an idiot

   he claims

   1) Pensions have risen faster than anything in recent years !!!!!!!!!!!!!!!!!!!!!!!!!
   even 5% on lousy State Pension last year did not cover the exponential rises in basic costs of food or light

   2) Anyone who has savings income that warrants 10% band already has a hige enough pot !!!!!!!!!!!!!!!!!!!!!!!!

   Since interest rates have nose dived and thus incomes halved to below even the Personal Allowance this really is a piece of s**t

   Millions are like me and never had the chance to save TAX FREE in a Pension Fund instead we scrimped and scraped and saved out of TAXED income only to be hammered by the last 5 years and FLS in particular

   Our savings ARE OUR PENSION

   Every single year I had to reclaim 4 figures in tax that was forcibly deducted from savings income
   now my income has nose dived from 16K to 7K and I am considered by this clown to have a huge pot and thus
   should not receive 10% band if interest rates ever rise again

   No doubt he is of course like the rest of this Government and Mervyn King on a 1/4 million pound a year Pension
   and envious of my mere 7K

   Bas***ds the lot of them

   Recommend (7)