Pay savings income without deducting tax, say campaigners

The Low Incomes Tax Reform Group (LITRG) has called for all savings income to be paid without deduction of tax at source2 when the new Personal Savings Allowance (PSA) is introduced next year. This would automatically give the correct tax due in the majority of cases, which would be welcome for both unrepresented taxpayers and HMRC, for whom it would reduce administration.

LITRG has also told HMRC it must provide clear communications and guidance to ensure individuals understand the PSA.

Anthony Thomas, Chairman of the LITRG, said: “If HMRC act on our recommendation, savers will know that no tax has been deducted from any of their savings income. They will not have to check whether or not tax has been deducted from each individual source of income. Otherwise, we believe that deduction of tax at source from some savings income will continue to confuse many low-income taxpayers and they will not claim back tax to which they are entitled.”

A potential drawback of not deducting tax at source is that some individuals will have to notify HMRC if their savings income is high enough to generate a tax liability. But LITRG believes that many of those affected will either be already in the habit of filing a tax return or will be able to deal with the tax through the new proposed digital tax accounts or process known as ‘making tax easier’.

Anthony Thomas said: “Treating all savings income similarly will remove much unnecessary complexity. Otherwise there is a risk that many non-taxpayers, or savers eligible for the starting rate on savings income, will continue not to reclaim tax deducted in excess of their liability, because they perceive it as a complicated process or are simply unaware that they can get some of their overpaid tax back.

“It is essential that HMRC provide clear guidance to help individuals understand whether or not they are eligible for the PSA, what type of income is eligible for the PSA, how much of their savings income falls within the PSA and how much is liable to tax. It is also crucial that HMRC make it clear how to calculate and pay any additional tax liability and how to claim a tax refund if appropriate.”

Notes to editors

1. LITRG’s recent submission on the ‘Deduction of income tax from savings income: implementation of the Personal Savings Allowance’ can viewed here.

2. Tax deducted at source means tax on savings income or interest is taken off by the payer before the saver receives the income.

3. Low Incomes Tax Reform Group

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.

4. Chartered Institute of Taxation

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.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification