Simplifying the taxation of savings income
31 May 2018
The UK tax regime offers a range of tax reliefs to encourage people to put money aside for their future needs: these work well for most taxpayers - 95% of people in the UK do not have to think about tax on their savings. This is because, since 2016, savings income up to £1,000 has been covered by the Personal Savings Allowance, dividends up to £2,000 are covered by the dividend allowance, and savers can contribute £20,000 a year to their ISAs on which income is not taxed.
However, aspects of the regime are complicated, difficult to understand, and can produce anomalous outcomes. There is evidence of widespread confusion about pensions, including research by the Financial Conduct Authority and the records of a low-income taxpayer representative body (for whom pension questions make up more than half the queries they receive about savings issues). In this regard, the tax treatment of lump sums is a particular cause of concern.
This new report ‘Savings income: routes to simplification’ from the Office for Tax Simplification (OTS) looks at the taxation of people’s savings income and identifies areas that might be simplified. The report provides a comprehensive picture of the taxation of:
- Interest and dividend income
- ISAs
- Pension withdrawals
- Life insurance bonds
- Collective investment vehicles such as unit and investment trusts.
The report identifies nine areas where further work would be beneficial, including:
- A review of the various savings rates and allowances, and the interactions between them, to identify options to streamline the income tax calculation
- Drawing up a personal tax roadmap to clearly set out the government’s vision for personal taxation, including plans for savings income
- Improving guidance on the taxation of savings income, particularly on the treatment of pension lump sums, an area of particular confusion
- Simplification of ISAs, including a review of the rules on withdrawals from the Lifetime ISA