The great savings tax swindle

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The way in which savings are taxed needs to change. The system is inequitable and the tax unfair. The way in which lower rates – designed to help those on low incomes – operate is poorly understood, bureaucratic and ineffective. Better-off savers are given generous credit terms to pay their tax whilst the poorest have to overpay immediately and must then reclaim that overpayment. To cap it all, the tax is levied even when the value of the savings has declined in real terms, despite this loss being caused by the Government’s management of the economy.

Penalising the poorest

Basic rate tax of 20% is usually automatically deducted from interest paid on savings accounts. This system works well, unless you have a low income and are not liable to pay this tax.

In theory, if your total income does not exceed your personal tax allowance, you can have interest paid without the deduction of tax by submitting an R85 form, although we know that in practice many people do not.

However, if your income is even one pound above your personal allowance you are not permitted to do this. Instead you must pay 20% tax on your entire interest income and then reclaim the overpayment. Contrast this with higher rate tax payers; they also pay 20% tax, much less than they owe, but have months in which to pay the additional amount owing.

There is a concession for savers on a low income in the form of a reduced 10% tax band which applies to savings up to £2,560 above your personal allowance. However, this results in complications for qualifying savers because it is impossible to have savings interest paid at 10%.

The result is that people on low incomes are penalised. We know of one saver who, despite only owing £93 in tax, had £1,265 deducted. She was thus deprived of £1,172 in income and had to wait until the end of the tax year to reclaim it, a considerable hardship for someone on such a low income.

Millions of low income savers overpay tax

Savers can reclaim overpaid tax either through a self-assessment tax return or an R40 (“Claim for repayment of tax deducted from savings and investments”) form. In response to our Freedom of Information Request HMRC estimated that in the 2009/10 tax year 3.5 million people would have been liable at the 10% tax rate but that only 550,000 made a reclaim through self-assessment.

We don’t have the figures for how many people made a claim with an R40 or how many people failed to complete an R85. Some of these 3.5 million will no doubt have taken advantage of ISAs and either partially or entirely avoided the problem. But a large number of savers are clearly paying more tax than they need to. A parliamentary report published in 2010 estimated that over 2.4 million pensioners overpaid tax on their savings income by around £200 million.

A hiding to nothing

As interest rates have fallen, so has people’s income. The saver we mentioned above who had to wait until the end of the tax year for a refund of over £1,000, no longer has this problem. Low interest rates have reduced her income by one third from £15,069 in 2010/11 to under £10,000 this year. How can this be a fair way to treat someone who has been financially responsible and saved in order to support themselves in their old age? The policy of low interest rates is supposed to help rebuild the economy; instead it is driving millions of pensioners into poverty.

Taxing a loss

To make matters worse, the Bank of England’s low interest rate policy has resulted in everybody’s savings losing real value. Over the last three years, since the base rate was reduced to 0.5%, the average interest rate paid on savings has been about 1.2% a year whilst inflation (both CPI and RPI) has averaged a little over 3.3% a year. Savers have lost 2.1% a year on their savings, yet are being taxed for the privilege.

Remove tax from savings

To resolve the unfairness of this situation we believe the Government should – as it promised in opposition – remove income tax on savings income. After all, with inflation at these levels, why should savers pay tax when, in real terms, they are losing money and when many of the poorest should not be paying the tax anyway?

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7 Comments

1. frances

   June 7, 2012 at 12:51 pm

   This article could not be more true but whats worse is George Osborne in promoting his Granny Tax had the brass necked audacity to say Pensioners had NOT SUFFERED AUSTERITY

   Since state pensions have in no way whatever risen to match the horrendous inflation on just basic food , heat and light every pensioner is immediately worse off

   The case highlighted above is repeated up and down the country every Pensioner who has no optiion but to exist on savings income will have seen a 30% cut in their income year on year

   Just how does the Government think pensioners can make ends meet being treated like that when they have done the right thing and saved for their old age

   Its THEFT on a massive scale deliberately orchestrated by George Osborne and his cohorts at the MPC

   Recommend (11)
2. John.

   June 7, 2012 at 6:24 pm

   The business of government is, in essence, to preserve the establishment and the advantages enjoyed by its wealthy elite. To deliver the population into indentured servitude to a global corporate central banking cartel and to guarantee their money-power hold over everyone is maintained. In return for their pact with the devil the politicians have their entire bankrupt edifice bankrolled and propped up by tax extortion, officially sanctioned fake money laundering and fractional reserve theft.

   All they are required to do in return is continue selling the entire nation and future generations into debt slavery, through reckless borrowing, deficit spending and the syphoning of public funds into private pockets.

   Recommend (12)
3. Ez

   June 11, 2012 at 7:14 am

   So, how would the Treasury recoup the lost £13 billion in tax?

   Recommend (0)
4. frances

   June 11, 2012 at 12:00 pm

   1)Stop all the expenses fiddles the MPs get up to
   2)Make MPs repay the increases in value of the 2nd homes they buy to be near Parliament when they sell
   3)Stop the Top Civil Servants /Quangos etc avoiding tax by being paid into a Company
   4)Tax Directors of companies on the Share Options they take in lieu of taxable pay
   5)Restore the 50p tax rate
   6) Stop allowing EU workers claiming tax credits etc for children not even living in the UK
   7) kick all illegal immigrants straight out instead of wasting money on housing them and paying Legal Aid
   8) Stop immigrants from getting Benefits and Health Care until they have worked here for 5 years
   9) Get out of the costly Human Rights Act

   The list goes on

   HMRC claim they “treat all Taxpayers even handedly ”

   They most certainly do not when it comes to the way standard rate taxpayers with savings are treated versus higher rate taxpayers or the self employed

   To be forced to wait a year to recover 4 figures in tax on savings that you simply do not owe as per the article is wholly unacceptable

   Recommend (12)
5. Ez

   June 11, 2012 at 3:21 pm

   >The list goes on

   But to little effect. Whether laudable or no, none of these would raise significant amounts and some would probably be a net cost in terms of the extra staff involved.

   The most cost effective way for the government to balance their books is to cut benefits unilaterally or hit easily collectible taxes like PAYE or VAT.

   Without a costed, constructive approach, the SOS campaign is not a runner.

   Recommend (2)
6. Leslie Sadleir

   July 1, 2012 at 5:00 pm

   If we savings-dependent, low-income earners want to be taken seriously and get a sympathetic hearing we have to be careful we are not blaming “them” for our inertia, naivety and bad choices. Not claiming what we are entitled to and making poor investment choices is our fault. Ill-informed rants don’t help either.
   Would it work if tax was only deducted after an allowance for inflation (a sum based on the previous 12 month average) was made?
   Leslie

   Recommend (1)
7. frances

   July 2, 2012 at 12:10 pm

   Sure will not help me
   I have dropped from paying 10% and 20% tax to being well below even Age Allowance and even standard Personal Allowance

   Its definitely not intertia

   Every penny is always in the highest rate accounts possible

   As for Benefits if you dare to have savings you can say goodbye to benefits or Pension credit etc

   Job seekers allowance savings limit has now been dropped from £8K down to £6K

   The Governments problem is its paying Benefits to workshy /malingerers and most importantly to millions who have no right whatever to be here and screwing prudent law abiding citizens in the process

   Even prisoners have a better standard of living than most Pensioners

   Recommend (5)