Monday, January 05, 2009

Cameron's Big Government Tax Cut?

So one of the big domestic politics news story of the day is that Cameron is proposing some tax cuts on savings. Specifically he announced that a Tory Government would abolish "income tax on savings for everyone on the basic rate of tax".

Now don't get me wrong, I love a tax cut, I think we need tax cuts, but think about the practicalities of this for a moment. How is a saver on the basic rate of tax going to prove to the bank that they are? More importantly how is the Government going to verify that the bank is telling the truth about its savers?

The result would be extra back office overhead for banks as they would have to process "I don't have to pay tax on my savings" claim. Wouldn't there also need to be official oversight and auditing of banks by Government - even more admistrative overhead - to make sure that claims were valid?

Great sounding idea, but for anyone other those of pensionable age - which is easy to know and doesn't require the banks to do much other than look at D.O.B. - isn't it going to be impractical and more than likely increase the size and scope of Government to inspect who is saving what and where?


Tony Kennick said...

I imagine that they will just stop the banks and building societies from applying tax on most savings accounts and put the onus on the tax payer to declare what they should pay. There will probably be an accompanying reporting requirement on the banks about certain sorts off accounts and balances/deposits over specified amounts. This probably won't be a huge overhead for the banks as it would be an extension of what they already have to do as part of anti-moneylaundering/organised crime regs.

Gasman said...

It seems to work ok at the moment for people who don't pay tax on their savings currently, ie those below the income tax threshold

View from the Solent said...

while I don't necesarily go along with the original suggestion, are you finding a problem that doesn't exist?
At present, basic rate tax is deducted at source from interest earned. A higher rate taxpayer then has to declare their interest, so that it can be taxed at the higher rate.
All that is needed is to remove the 'deduct basic rate at source' step.

Mark said...

I'm not sure that's true Dizzy.

My understanding of the way things work at the moment is that if you are a basic rate (20% band) tax payer then you do not need to do anything. The bank just assumes that you are in this band and deducts the tax on the interest accordingly. If you are below this taxable threshold (e.g. unemplyed or a student) you need to tell the bank, fill in a form and then they will not deduct anything. If you are a higher rate tax payer then you have to fill out a tax return at the end of each year and the extra tax due on the interest is calculated then and resolved as part of the return. There is no admin for this on the part of the banks.

So I think that all that needs to change is for the banks to not deduct the 20% tax by default. The rest can stay as is. In fact it might be less admin because the students, unemployed etc. will no longer need to fill out the exemption forms all all are exempt by default.

Anonymous said...

Non taxpayers have long been able to avoid having tax deducted at source from their savings (thus meaning they they have to fill in a tax form to claim the tax back) back by making a one off declaration to their bank (form R85). I think banks would actually find it less burdensome to extend this principle to all basic rate taxpayers rather than having to act as unpaid tax collectors for them to the government.

dizzy said...

I would be surprised if this was a "don't bother taking anything by default" situiation because then the onus is on everyone to make sure they tell the bank they should be paying tax. The potetnial to lose tax revenue in that case would be massive surely?

dizzy said...

"At present, basic rate tax is deducted at source from interest earned. A higher rate taxpayer then has to declare their interest, so that it can be taxed at the higher rate. All that is needed is to remove the 'deduct basic rate at source' step."

With small numbers of people declaring themselves exempt I can see how that would work, but this one seems to me to be of such a great number it will need greater oversight surely?

Richard said...

Dizzy, the current system is that the banks only deduct basic rate tax (20%), so higher rate taxpayers (40%) have to declare their income to the Revenue and pay the extra 20%. The banks are not involved in that stage.

Therefore Cameron's proposal would reduce admin for the banks (assuming they would no longer deduct tax from anyone's interest).

The higher rate taxpayers would still have to declare their interest income to the Revenue, just as they do now. But they would have to pay the full 40%, not just the "top-up" 20%.

Is there a higher risk of tax loss? A bit, because currently if a higher rate taxpayer doesn't declare his interest income to the Revenue they only lose 20%, under this they would lose the full 40%. But the system is still the same, and the Revenue would still do spot-checks just as they do now. Overall there isn't any extra admin cost and there are some benefits.

kinglear said...

There's a form you fill in NOT to have tax deducted from your savings interest. Once verified it's fine.

Anonymous said...

I think Gordon Brown is ahead of the game here. By getting interest rates down to zero, no-one at all will have to pay tax on their savings.

dalesman said...

Isn't it true, anyway, that this will only be in place if there is a General Election this year?
Anytime after 2009 it won't apply.

WV = doped

Anonymous said...

Doubt if they would ditch the deduction of tax at source method altogether because then foreign-based taxpayers would find it too easy to avoid paying tax on savings they held in UK institutions. I suspect the R85 route is the way the Revenue would go. But I don't see why this would be a greater administrative burden on the banks than the present situation. It would be quite easy for the Revenue to match up the R85 with the relevant individual to check he/she really was a basic rate taxpayer.

nick said...

If there's no tax on savings for basic-rate taxpayers, there may also be savings for the banks and the Revenue in admin of the current ISA system. Only higher-rate taxpayers (and those who expect to become so before they draw on their savings) would have any need for tax-exempt accounts.

Lola said...

One thing that it might tackle is the taking of our tax breakes by the banks when saving into an ISA. That is comparing gross rates on non ISA savings to the tax exempt rates in ISA's shows that the banks only pass on some of the tax relief. ISA rates are lower than non ISA rates.

On top of this restoring the ability for non taxpayers to relaim the tax on dividends stolen by Brown in 1997 would be a much more effective tax cut. It would lift the incomes of the modestly invested and as a by-product lift equity prices.