Draft Finance Bill 2016 Clauses 1-4 Savings allowance and savings nil rate and deduction of tax at source - CIOT comments

By Technical Team on 29 Jan 2016

Savings allowance and savings nil rate and deduction of tax at source, consultation on draft clauses 1 & 4 Finance Bill 2016.

Draft clause 1 introduces a new nil rate of tax for savings income (such as interest) within a savings allowance for individuals. Each individual will have an annual savings allowance of £1,000, unless they have any higher‐rate income for the year (in which case their allowance will be £500) or any additional‐rate income (in which case their allowance will be nil). The clause will have effect for savings income paid or credited on and after 6 April 2016.

Draft clause 4 and Schedule amend Part 15 of the Income Tax Act 2007 (ITA) to remove the requirement upon deposit‐takers (such as banks), building societies and other institutions to deduct sums representing income tax from the interest or other returns they pay on certain savings, investments and alternative finance arrangements. Again, the changes have effect in relation to interest paid or credited on and after 6 April 2016.

The introduction of the savings allowance, combined with the cessation of the Tax Deduction Scheme for Interest (TDSI), will represent a small tax reduction for the majority of taxpayers who have small amounts of investment income, and there will be a compliance saving for a number of taxpayers - but there will be exceptions.

The CIOT’s and LITRG’s submissions to HMRC on the draft clauses express concern about the way it has been designed which we think will lead to unnecessary complexity and some ‘cliff-edge’ tax liabilities for taxpayers whose income levels fall just over the higher-rate threshold.

EXAMPLE:

Becky has earned income and £1,000 of savings income.  Her total income equals the basic rate limit, so she is entitled to a £1,000 savings allowance.  Her savings income is taxed:

£1,000  x    0%  =  £0.00

Anne has earned income and £1,000 of savings income.  Her total income is £1 above the basic rate limit, so she is entitled to a £500 savings allowance.  Her savings income is taxed:

£500  x    0%  =  £0.00
£499  x  20%  =  £99.80
£1      x  40%  =  £0.40

                        £100.20

For Anne, a £1 increase in income produces a dramatic £100.20 tax charge, so Anne is in fact £99.20 worse off than Becky.  This is clearly unfair under any measurement. CIOT point out that one of the consequences with any cliff-edge is that taxpayers will try to avoid it.

The new savings allowance is complex because not only are there two different savings allowances depending upon whether a taxpayer is a basic rate or higher rate taxpayer (three if you include the fact that the allowance is not available to additional rate taxpayers), but also because despite its name, the savings allowance is not actually a tax free ‘allowance’.  Savings income that is within the ‘allowance’ will still count towards an individual’s basic and higher rate limits.  Therefore it will still affect allowances and charges which are dependent on whether an individual’s income crosses a particular threshold, for example, the High Income Child Benefit Charge (£50,000) and the personal allowance income limit (£100,000).

In addition, the starting rate for savings is retained and will operate alongside the savings allowance.  It is likely that this will be very confusing for the 1.4 million taxpayers who will still be paying tax on some of their savings income after the measure is introduced. Both the CIOT and LITRG suggest that it should be renamed in the legislation to make it clear that it is not an allowance in the widely understood sense of the word.

We ask that HMRC produce guidance and tools which provide clear explanations and worked examples of how the savings allowance interacts with the new ‘dividend allowance’, the various tax bands and the starting rate for savings.  Taxpayers need to be able to understand it so they can make informed decisions about their financial affairs. LITRG also call for a proactive communications strategy to draw taxpayers’ attention to the changes.

We also have concerns about the compliance burden that the introduction of the savings allowance and dividend allowance will have on trusts and personal representatives, since neither trustees nor personal representatives will receive the savings allowance (or the dividend allowance) and will remain liable to the trustee or standard rates applicable in full on the relevant category of income..

The CIOT’s full response can be found here.

The LITRG response can be found here.

The ATT also submitted comments on Clause 1 to HMRC raising a number of similar points to CIOT and LITRG. As the ATT submission was also submitted in evidence to the Finance Bill Sub-Committee, which requests that evidence remains unpublished until accepted as evidence, the ATT response is not at the time of print available to read on our website. However, it will be available to read on the Technical pages, under ‘Submissions’ in due course.

Technical Team

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