Making Savings and Pensions Tax Simple

Published / Last Updated on 29/05/2018

Tax SimplificationThe Office of Tax Simplification has published its paper “Savings income: routes to simplification” in an effort make the taxation of savings, investments and pensions easier and to actually make it more appealing for us to save.

It tackles a number of core areas including savings and dividend income, taxation, rates and allowances; ISAs, Pension income, Life assurance bond withdrawals and collective investment schemes.

The report highlighted:

Savings and dividend income: taxation, rates and allowances v Individual Savings Accounts (ISAs)

95% of us pay no tax on savings income from bank interest or dividends using the £1,000 pa tax free interest Personal Savings Allowance for basic rate tax payers (£500 pa for higher rate tax payers, zero for 45% tax payers), the additional 0% ‘Starting Rate for Savings (SRS)’ income tax rate of £5,000 pa tax free interest income for lower income individuals and also the £2,000 pa tax free dividend allowance for shares and equity income investments.  Yet, more people are aware of the tax benefits of ISAs and not these savings allowances. 

It concluded that these allowances do simplify the taxation of savings income but more needs to be done to make the public aware of all of their allowances to ensure optimal savings strategies.

Pension income

More needs to be done to make people aware of the tax implications when using the flexible drawdown pensions freedom rules.  There are slightly different tax implications for those withdrawing under small pots rules compared to normal flexible drawdown rules and then subsequently being taxed at higher than expected rates at source only to then have to approach HMRC for refunds, where applicable. 

They concluded that these need to be simplified i.e. amending the taxed are source ‘emergency tax code’ application on pension fund withdrawals (in simple terms if you withdraw £10,000, you are taxed as if you are withdrawing £10,000 per month, and then you can have to reclaim overpaid taxes.  Simplify these alongside early withdrawals from Lifetime ISAs.

Life insurance bond

Withdrawals and the tax calculations, after the 5% annual allowance, are complex using ‘top slicing relief’ (see our video and calculator) and more needs to be done after the ‘bedding’ down of the slightly easier vertical/horizontal’ calculation rules introduced in 2016 (this means cashing in individual segments or cashing in across all segments has been simplified).

The OTS has suggested a flat rate of tax on all withdrawals that would increase until investments held until year 10, would encourage longer term savings rather than the above ‘top slicing’ calculations.

Fantastic read

Having now read the Savings income: routes to simplification” paper, we thought it was one of the best government department papers we have seen for a while highlighting the complexity of taxation on our savings, investments and pensions, with some very simple suggestions to literally, make tax simpler and encourage us to save more.  Read the report.