Why Should I Pay Tax Twice on My Savings?

Now I believe that if you want to live in a country with decent public services, you should be willing to pay a reasonable amount of tax toward these services. I am eternally grateful to the NHS for the free at the point of use care that our twin sons received when they were born prematurely. However, I don’t think it’s fair to pay tax twice on earnings which I save. I already have to pay income tax on my earnings and if I put that money into a savings account, I’m taxed again on the interest received.

Yes, there are tax free Cash ISAs, but if you’ve been saving for more than 30 years, you probably won’t be able to shield all your savings in Cash ISAs.

I put some of our savings in a 5 year National Savings & Investment Growth Bond, paying a fixed rate of 4.65 %, in November 2009. However, after 20% income tax is deducted from the interest, I’m only getting a net (after Tax) rate of 3.72%, a 0.92% real return, with inflation (RPI) currently at 2.8%. If I didn’t have to pay tax on that interest, my real return would be a much more respectable 1.85%.

I’m not talking about the UK being a tax free haven for the wealthy, but I do think that there needs to be more of an incentive for people on low to middle incomes to save.

I’ve already suggested one solution to this issue, doubling the current £5,640 Cash ISA limit to equalise it with the Stocks & Shares ISA limit.

Another possibility is not having to pay tax on the interest on your savings if your income is below the threshold for higher rate income tax, currently £34,731.

One Response to “Why Should I Pay Tax Twice on My Savings?”

Julie at Nutmeg on August 21st, 2012 at 10:46 am

I think it’s easy to forget that once income becomes capital it can incur a second wave of tax. Your ideas of doubling the current Cash ISA limit or allowing people to not pay interest income if their earnings are below the higher rate income tax are interesting ones.