Friday, October 2, 2015
The UK's new Personal Savings Allowance (PSA) should be applied automatically to savings income, rather than tax being first deducted at source, the UK's Low Incomes Tax Reform Group has said.
A PSA will be introduced with effect from April 6, 2016. It will exempt up to GBP1,000 (USD1,514) of savings income received by a basic rate (20 percent) taxpayer from tax. An exemption for savings income of up to GBP500 will be allowed for higher rate taxpayers (subject to a 40 percent income tax rate). It will not apply to savings income received by additional rate (45 percent) taxpayers.
Banks and building societies currently deduct tax from interest they pay on deposits made by individuals, partnerships, and trusts under the Tax Deduction Scheme for Interest (TDSI). This deduction arrangement will cease with effect from April 6, 2016, meaning that such interest will be paid without deduction of tax.
In its submission to a Government consultation on the proposals, LITRG welcomed the planned cessation of the TDSI. It said that the majority of savers would no longer pay income tax on their bank or building society interest and would not have to complete various forms to receive gross interest or claim a refund of overpaid tax on savings income.
LITRG noted that a potential drawback of not deducting tax at source is that some individuals will have to notify HM Revenue and Customs (HMRC) if their savings income is high enough to generate a tax liability. Nonetheless, LITRG said that many of those affected will either already be in the habit of filing a tax return or be able to deal with the tax through HMRC's proposed new digital tax accounts system or the process known as "making tax easier."
LITRG Chairman 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."