Details about George Osborne’s ‘savings revolution’ were unveiled during this year’s budget announcements and include the new Personal Savings Allowance. Designed to encourage people to save, this policy will mean that 17 million people will not be taxed on their savings.
If you are a basic rate taxpayer, then you can earn £1,000 from savings before you are taxed. If you are a higher rate taxpayer, you will not be taxed on the first £500 of your savings income. For 95% of savers – this sounds good, so far.
BUT – there are also changes to tax collection on the interest earned from savings and the administration of this part of the policy is causing concern among many financial and accountancy professionals.
Savings and your income tax
At the moment building societies and banks automatically take off your 20% income tax payment from the interest you are paid on savings that are not ISAs. As of April 2016, these automatic deductions will not be made and you will receive your full interest payment into your savings account. This means that if you earn more than the previously stated amounts in savings income, you will be responsible for declaring that amount to HMRC in the tax year 2016-17. By 2017-18, the plan states that declarations will then become unnecessary because the tax will automatically be taken by HMRC.
For example, the new changes will mean that taxpayers who earn more savings income than the new personal allowance will have to declare to HMRC. That means that someone with savings of £31,000 or more, with an interest rate of 3% and as a basic rate tax payer, will have to comply.
The fear is that this will involve thousands of taxpayers having to fill in self-assessment forms for the first time and suffer fines, or even prosecution, if they are caught out by the system. There are a potential 830,000 taxpayers who will join an already over-burdened process. As Patricia Mock, a Deloitte tax director, explains,
“This could particularly hit pensioners, people who are basic rate taxpayers who in the past haven’t needed to file a tax return. There is going to need to be a massive communications exercise, it will be very difficult.”
Personal savings allowance
As it stands, HMRC’s own recent survey showed that many taxpayers don’t understand the current system. It discovered that many higher rate taxpayers were “generally unaware” that they are supposed to pay more tax on their savings interest now!
This isn’t through willful tax avoidance but simply because “most people expected tax on savings to be deducted at source or automatically through banks and building societies.”
The same surveyed taxpayers generally agreed that tough consequences would make them more inclined to tell HMRC of any possible taxable income. With one high rate taxpayer commenting, “Scare tactics are your best bet: ’You’re going to end up in prison, you’re going to end up with a record.’”
Perhaps simple, thorough communication could be an alternative first step?
Anna Bowes, of ‘Savings Champion’ (a website that monitors rates), also expresses concern about the implementation of this new change,
“HMRC really need to think carefully about how they educate all those people who have been used to having their tax deducted at source. Whilst the personal savings allowance will be a huge boost to so many people, thousands may be caught out, or worse, fined when they’ve never had to think about this before.”
An HMRC spokesperson is quite firm about self-assessment tax returns not being the answer to this tax collection question,
“There is no question whatsoever of savers having to complete tax returns covering that one gap year’s savings income. We will be looking at a range of options for savers to report this income but this definitely won’t include filling in tax returns, that is not going to happen.”
You heard it here first! Let’s hope a carrot is included with the stick.
