Tax on savings income to get simpler?
Jul 06, 2018
The Office of Tax Simplification (OTS) has published a new report which looks at how people’s savings income is taxed, and has identified areas where it might be simplified.
Over half the adults in the UK (65%) put aside some of their income into savings. Our UK tax system encourages people to save for the future by offering a range of tax reliefs. Usually the tax reliefs on savings income work well for most taxpayers, and mean that 95% of people will pay no tax at all on their savings. The Personal Savings Allowance, introduced in 2016, allows you to save up to £1,000 a year tax free. Dividends up to £2,000 are covered by the dividend allowance, and you can save up to £20,000 a year into an ISA which isn’t taxed.
Why savings income taxation is under scrutiny
Like lots of areas of tax, many parts of the system are complicated and difficult to understand. There are also instances where tax reliefs can result in inconsistent outcomes, and the OTS are keen that these relief rules are now made simpler.
Angela Knight, the Chairman of the OTS commented:
“The UK savings tax system works well for most savers, as they don’t have to pay tax on income from their savings until it reaches more than £1,000 a year. They can also contribute £20,000 a year to their ISAs, where the income is not taxed either.
“But many taxpayers continue to worry that they will be taxed on their savings income and misunderstandings and confusion remain. This is the area, and inevitably the complexity, that the OTS considers it is now time to address.”
Paul Morton, OTS Tax Director added:
“This is the first broad review of its type into the application of the tax system to savings and investment income. It seeks to identify ways to remove some of the real complexities in the system and help taxpayers understand their position.”
What the OTS report will cover
This new report from the OTS takes a thorough look at how the following areas are taxed:
- interest and dividend income
- pension withdrawals
- life insurance bonds
- collective investment vehicles, such as unit and investment trusts
The report also highlights numerous areas which would benefit from further analysis, including:
- a review of the different rates on savings and allowances and how they function alongside each other, with the aim of reorganising how income tax is calculated
- creating a ‘personal tax roadmap’, which clearly explains the government’s vision for personal taxation, including plans for savings income
- improving advice on how savings income is taxed, particularly regarding how to deal with pension lump sums, which is a very confusing area
- how ISAs could be simplified, including an assessment of the complicated rules on making withdrawals from the Lifetime ISA
- a review of the rules on partial redemption of life insurance bonds.
The OTS is an independent body, and although it advises the government on tax simplification, it’s not in a position to implement any changes. These are a matter for government and for Parliament, so we shall wait with fingers crossed that its suggestions are adopted soon!