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Tony Wickenden: Helpful tax advice behind the headlines

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There appears to be some competition between newspapers for the title of the people’s champion on tax reform.

In the past, we have had the Daily Express campaign on IHT. More recently, the Times made something of a splash by “outing” the rich and famous in relation to all means of exotic tax avoidance schemes.

Now we have the Telegraph. Its clarion call is to “axe the tax on savings”.

The claim is that (mostly due to low interest rates) the “tax cost” to the Government of axing tax on savings would be £1.76bn – way down from what it would have been in a “higher interest past”, so the proposed “axe” would pass the “cost/benefit” test.

The Telegraph’s campaign is primarily centred on removing the tax from interest on the deposits of individual investors.

The opening salvo in the campaign first rehearses the taxation fundamentals in relation to interest with a reminder that 20 per cent tax is deducted at source on interest. Non-taxpayers can receive interest gross through the completion of Form R 85 of course.

We are also reminded by the paper that those on low earnings have to pay only 10 per cent on interest but the full amount is still deducted at source and they have to complete a special form to reclaim the overpayment, which will be paid up to a year later. Many fail to realise this and consequently many people fail to claim some tax back.

The Telegraph states that the latest figures show that of the £1.5 trn in British bank accounts, HMRC pocketed £1.76bn last year. Owing to falling interest rates, this is less than half the £4.36bn that the taxman took three years ago.

The argument on which the “tax axe” campaign is founded is that axing savings tax could make a significant difference to individuals, particularly those on lower incomes.

Despite assurances that inflation would fall this year, figures published recently showed that the cost of living was accelerating again. With inflation, as measured by the Retail Prices Index, rising to 3.2 per cent, only 58 of the 1,000 accounts available pay a real rate of return for basic-rate taxpayers after tax and inflation are taken into account.

Two of the suggestions put forward by the Telegraph for reducing the tax on savings are as follows:

Halve savings tax for basic rate taxpayers

Deducting just 10 per cent tax at source from all savings interest would be far fairer as it would ensure that those on lower incomes werenot overpaying then having to claim some of their money back. It would also bring the taxation of savings into line with dividend tax.

This is seen by many as an anomaly benefiting wealthier savers who can afford to take on the risk of investing in shares.

It would, at a stroke, boost returns for all basic-rate taxpayers and it could still require higher earners to pay a higher tax rate through their self-assessment returns. It is estimated that this change would cost less than £1bn.

Double the Isa allowance

A significant increase in the Isa subscription limit would enable people to make more substantial savings towards their retirement. If it was doubled, this would not necessarily double the £2.1bn that the Treasury estimates Isas cost it, as many would not be able to afford to save this much each year. Saga director general Ros Altmann argues that, at the very least, the Government should allow people to put the maximum £11,280 subscription into cash deposits inside their Isa.

She says “At the moment, people can only put half this allowance in (sic) cash. Why should the Treasury differentiate in this way? Older people often quite rightly do not want to risk their money on stocks and shares, yet this means they lose half their annual tax-free Isa allowance.”

These changes may come to pass but, even if they do not, through experienced financial advice investors can substantially reduce their tax on savings under the current law.

Let’s look at the current available possibilities for “self-instigated” tax savings in relation to the first two of those Telegraph headings.

1. Halve savings tax for basic-rate taxpayers.

  • Investing through an Isa can take the rate of tax on income and gains to nil

  • Maximising use of a non-working spouse’s personal allowance and annual CGT exemption can facilitate tax-free income and gains

  • Grandparents investing for children can ensure that income is tax-free up to the child’s personal allowance

  • Parents and grandparents can deliver tax-free capital gains through children’s investments

  • Offshore bonds can enable tax deferral and then, with exit planning, tax-free or substantially tax-free reduced returns

2. Double the Isa allowance.

  • Ensure that each spouse uses their Isa allowance. One spouse can provide the funds for the other to use their allowance

  • Donot forget the JISA for tax-free children’s investments

The latest Telegraph campaign represents another excellent opportunity for advisers to use the raised profile given to the importance of tax to “showcase” their financial planning skills. Increasingly, tax planning is moving to the centre of financial planning strategy.

Tony Wickenden is joint managing director of Technical Connection

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