We are all aware that navigating the ISA maze can be a nightmare, with different rules for ISAs, LISAs, Help to Buy ISAs etc. And the introduction of the Personal Savings Allowance, while welcome, has added further confusion.
So, it’s good news that last week, the Office of Tax Simplification (OTS) published a paper exploring ways of simplifying the taxation of individuals’ savings income.
The OTS is the independent adviser to government on simplifying the UK tax system.
The UK tax regime offers a range of tax reliefs to encourage people to put money aside for their future needs, but aspects of the regime are complicated, difficult to understand and produce anomalous outcomes.
This complexity could well be one of the reasons that growth in personal deposits & savings is at rock-bottom, according to recent data from UK Finance.
The OTS Chairman, Angela Knight said:
“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 is more than £1,000 a year and 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 is now the time to address.”
The paper reviews cash savings related tax reliefs such as the Starting Rate for Savings (SRS) and the Personal Savings Allowance (PSA) but it is also taking a wider look at;
- The various kinds of ISAs that are available.
- The taxation of dividend income and the dividend allowance.
- Pension income.
- Life insurance bond withdrawals.
- Unit and investment trusts, Open Ended Investment Companies and unregulated funds.
According to HMRC, most taxpayers no longer need to pay tax on their savings. However, the cumulative impact of the relevant reliefs and allowances, adds significant complexity, in particular for those on the borderline. But, the OTS believes that there is scope to simplify the rules.
Looking just at cash savings, some of the potential approaches to simplifying this area are as follows;
- Make savings interest completely tax free, either for basic rate payers only, or for individuals with total income below a certain threshold, or for individuals over pension age.
- Amalgamate the Starting Rate for Savings (SRS) with the Personal Savings Allowance (PSA), resulting in a combined allowance of £6,000 for basic rate taxpayers, or £5,500 for higher rate taxpayers. This would reduce the complexity arising from having two separate allowances and would remove the condition attached to the SRS, which only applies in circumstances in which non-savings income is below a certain amount. Anyone who has tried to work out if they qualify for SRS will understand just how complicated this is.
- With regard to ISAs, the OTS considers that changes can be made to simplify ISA rules for investors: for example, allowing partial transfers of money invested in the current tax year (in line with transfers from previous years’ ISAs).
- The OTS is also is also suggesting that future transfers from the Help to Buy ISA into the Lifetime ISA (LISA) should be facilitated without affecting the annual Lifetime ISA allowance.
- They are suggesting removing the regulation that an investor may only take out one ISA of each type per year, subject to the overall annual limit. The current rule can prevent full utilisation of the allowance, for example, if you open a Help to Buy ISA, you can’t usually also open another normal cash ISA to maximise the allowance. Also, if you open a fixed rate cash ISA using part of the allowance and then wish to maximise at a later date, you normally cannot add to that fixed rate product outside of a narrow window and you can’t open another cash ISA in the same tax year.
- They are also suggesting a revisit to the rules on early withdrawals from the Lifetime ISA whilst the number of authorised LISA managers and the uptake of the LISA is still relatively small. There have also been calls to extend the age at which a LISA can be taken out, from 40 to 50 or older.
Of course, many of these suggestions would come at a cost to the exchequer and as we’ve seen with other reviews, such as the FCA cash savings market study back in 2015, there may be very little change – but it is the first broad review of its type, so hopefully there will be some positive simplifications to come.
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