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The great savings tax swindle
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?