Tax allowance for savers will not be straightforward

From April 2016 the government will introduce an allowance to remove tax on up to £1,000 of savings income for basic rate taxpayers and up to £500 for higher rate taxpayers. The government say that savings income that remains taxable will be collected through the PAYE coding system.

The CIOT agrees with the underlying point that the current system of savings taxation in the UK is beset by complexity. Therefore taking interest income out of the tax net for the large majority of savers is a good thing. But the proposal to introduce an allowance of £1000 or £500 (depending on income levels) in addition to the starting rate band for savings income (for 2015/16 savings up to the starting rate limit of £5,000 are tax free for those on lower incomes1) is hardly straightforward. The requirement for banks to deduct 20% automatically at source is to be removed so savers who have income exceeding the new personal savings allowance will need to make sure that their savings income is instead coded out against their PAYE source(s) assuming they’re employed or in receipt of pension income.

Patrick Stevens, the CIOT’s Tax Policy Director comments:

“There will be some devil in the detail to ensure that the switching of obligation from deduction at source to HMRC via the coding notice goes smoothly and that those on the margins of the two rates of allowance understand their position.”

Notes for editors

1.       It was announced at Budget 2014 that from April 2015, if your total income is less than your personal allowance, plus £5,000, your savings will be tax free.  Therefore prior to today’s announcement, anyone with a total income of less than £15,600 would not pay any tax on their savings. The new tax allowance is in addition to the starting rate band of £5,000 and the annual personal allowance.

2.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.