‘Needlessly complex’ personal savings allowance comes under fire

Reporter, Accountancy Daily [2010-2021]

12 Feb 2016

There has been mixed reaction to the introduction of the new tax-free personal savings allowance (PSA) with warnings that the change is over-complicated and is likely to cause confusion for taxpayers who will also have to submit regular reports on savings income to the taxman if they are to avoid punitive penalties

From April 2016, HMRC is introducing a tax-free personal savings allowance of £1,000 (£500 for higher rate taxpayers) for savings income or interest. The allowance will replace the deduction of income tax at source from savings interest.

The Low Incomes Tax Reform Group (LITRG) accepts that the changes will simplify the tax position for most people who have modest amounts of savings income but points out that at the same time taxpayers will also have to take into account the new tax-free £5,000 dividend allowance which replaces the dividend tax credit from April 2016.

The dividend allowance means that individuals will not have to pay tax on the first £5,000 of their dividend income, regardless of what non-dividend income they have.

In addition, since April 2015 the starting rate of tax for savings income has been zero per cent.

LITRG warns that many taxpayers will 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. It points out that all three are essentially nil rate bands of tax that operate differently from one another.

The new allowances are particularly confusing for 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.

It is concerned that 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.

In addition, individual savers have to keep HMRC up to date with changes to the value of their savings or risk sanctions for a failure to notify.

LITRG cautions that many taxpayers will feel the different levels of savings allowance result in unfair 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.

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.’

LITRG is also calling for a name change for the new allowance, with Thomas adding: ‘It would be more transparent and simpler to term the savings allowance as a zero tax band rather than describing it worryingly and misleadingly as an allowance.’

HMRC needs to provide very clear guidance on the changes, including worked examples and an online calculator. The group says it is also crucial that such information is available in hard copy format as well as online to help the large numbers of digitally excluded taxpayers.