Government urged to scrap Personal Savings Allowance

Following the Bank of England's decision to cut the base rate to 0.25%, the Government should abolish the Personal Savings Allowance and replace it with an interest exemption, say chartered accountants Blick Rothenberg.

Related topics:  Savings & Investments
Rozi Jones
18th October 2016
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"Given the historically low interest rates, and with a further rate cut speculated, the Government would be better introducing an exemption from income tax for interest generated on cash savings"

The Personal Savings Allowance, which has only been in place since 6 April 2016, allows exemption from tax for the first £1,000 of interest for a basic rate tax payer and £500 for a higher rate taxpayer. Additional rate taxpayers (those with income over £150,000) are not eligible for the allowance.

Applying the 0.25% rate, a basic rate taxpayer would need £400,000 of savings to fully utilise their £1,000 Personal Savings Allowance. A higher rate taxpayer would need £200,000 of savings.

Recent data shows that the highest paying cash ISA would generate less than £100 of interest per annum on the maximum annual allowance of £15,240. Blick Rothenberg says that with this in mind, "it questions the purpose of the Personal Savings Allowance in the UK’s cluttered tax legislation".

Nimesh Shah, Partner at Blick Rothenberg, said: "I expect it is highly unlikely that someone with £400,000 of savings will be a basic rate taxpayer! In addition, those individuals with sizeable savings are likely to have taken advantage of their ISA allowances over the years, Therefore a person would need such savings outside of their tax-free ISAs to benefit from the Personal Savings Allowance.

"Over the last 5 years, the Government has tinkered with personal allowances and income tax rates and there are a number of unnecessary provisions which should be abolished to simplify the personal tax system. The Personal Savings Allowance is one of several measures that the Government, together with HM Revenue & Customs and the Office of Tax Simplification should look at scrapping.

“Given the historically low interest rates, and with a further rate cut speculated, the Government would be better introducing an exemption from income tax for interest generated on cash savings in UK bank accounts.”

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