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Is the savings allowance
a good idea and why is it so complex?
THE Government's new savings
allowance is being reported by many as an excellent idea, but needlessly
complex in its implementation.
The new allowance will replace the deduction of income Tax at source from
savings interest. Low Incomes Tax Reform Group (LITRG) believes the Government's changes will simplify the
Tax position for most people who have modest amounts of savings income and
deliver the right result in the majority of cases.
But the Group believes many Taxpayers will really struggle to understand the
operation of the new Tax Free savings allowance, and how it interacts with
the starting rate for savings and the new Tax Free £5,000 dividend allowance; all 3 of which are essentially nil rate bands of
Tax that operate
differently from one another. This is not straightforward and those most
confused with the raft of changes may include people with incomes that
fluctuate year to year or those who find themselves within the higher rate
band for the first time after a pay rise or other change.
LITRG worries that unrepresented Taxpayers will not be aware of the need to
check the level of their savings income, and not understand how to work out
the Tax rate that applies. They may also not realise they need to keep HMRC
up to date with changes to the value of their savings or risk sanctions for
a failure to notify. A related concern is that many Taxpayers will feel the
different levels of savings allowance result in 'arbitrary and unjust'
results because of the mechanics of how the savings allowance is worked out;
for example, Taxpayers may lose £500 of savings allowance if they are pushed
into the higher rate Tax Band by just £1.
As well as pushing for greater public education than at present about the
changes, LITRG has asked the Government to consider whether the savings
allowance should operate along similar lines to the new dividend allowance
as its operation is simpler to explain and consider. LITRG also suggests a
name change to the savings allowance.
Anthony Thomas, LITRG Chairman, said:- "The highly complex operation
of the savings allowance must be addressed to improve its clarity and avoid
people feeling that they face arbitrary and unjust Tax bills. A savings
allowance that works similarly to the dividend allowance would potentially
be much simpler to understand and use and seriously should be considered.
It was a mistake to drop the word personal from personal savings allowance,
which creates potential confusion with Individual Savings Allowance (ISAs)
and Self Assessment (SA). It would be more transparent and simpler to term
the savings allowance as a 0 Tax Band, rather than describing it
worryingly and misleadingly as an allowance.
If the plans go ahead unchanged, we call on HMRC to ensure very clear
guidance is made available and there is sufficient publicity to draw
people's attention to the changes. Ideally, there should be worked examples
and also online calculators. It is also crucial that such information is
available in hard copy format as well as online to help the huge numbers of
digitally excluded Taxpayers.
People should keep an eye on their level of savings income to ensure they do
not stray into a different Taxable Band. They should also continually check
data received from HMRC."
The savings allowance and dividend allowance will come into effect in April
2016. Since April 2015 the starting rate for savings has been 0%. LITRG's recent response to Finance Bill 2016 was the
1st time LITRG has
had the opportunity to comment formally to the Government about the dividend
allowance and savings allowance as a package.
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