Following the Bank of England’s emergency cut in interest rates to 0.25%, the Government should abolish the Personal Savings Allowance and replace it with an interest exemption, say tax and advisory firm Blick Rothenberg.
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.
Nimesh Shah, Partner at the firm 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..
The highest paying cash ISA would generate around £350 of interest per annum on the maximum annual allowance of £20,000. With this in mind, it questions the purpose of the Personal Savings Allowance in the UK’s cluttered tax legislation.
Nimesh added: ‘Over recent 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.
‘With pensioners’ savings taking a significant hit with the stock market downturn over the last few weeks, a tax exemption on interest generated on cash savings in UK bank accounts would be a welcome move.’
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