Reading the small print and between the lines of the Chancellors recent budget, has become aware that whilst many people will still retain massive tax advantages for investing in single premium life insurance bonds, higher rate tax payers who encash their plans early will be hit with an extra 2% to pay.
What does that mean? In brief, life insurance bonds have tax paid by the insurance company before you receive the growth. Tax was deemed to be paid by the insurance company at a rate of 22%. For basic rate tax payers this means that no further tax was paid on encashment. For Higher rate tax payers, on encashment meant that you paid the marginal rate difference i.e. 18%.
The change is that insurance companies will now be deemed to have paid 20%, meaning that higher rate taxpayers will pay the balance i.e. 20% on encashment.
Our view:
Yet more stealth. Even though insurance companies were deemed to have paid 22%, they rarely paid this amount as they offset losses against gains, the actual rate paid is nearer 12%. By them making the adjustment by what has been deemed to have already been paid from 22% to 20%, it does not affect insurers as the limit is probably still well above what they are actually paying taxes on anyway - so no change for them.
However, for a higher rate tax payer it means having to pay an extra 2% on encashment (a real increase in the tax burden of over 12%!). Inflation linked? We think not. Our clever Chancellor strikes again!
Bonds are still a great deal for older people and higher rate tax payers as a means for deferring tax, avoiding reducing age allowances or getting a tax free "income"