Why I Think the 0% Rate of Income Tax on Savings is Unfair

Written by Karen Bryan

hmrevenueThe 10% starting rate of income tax on savings is being abolished. From 6 April 2015, if your total income from all sources including wages, benefits, pensions and interest on savings is less than your personal allowance plus £5,000, you can register to receive tax-free interest from your savings account(s).

To give an example, the personal allowance is £10,600 for the tax year starting on 6 April 2015 – 5 April 2016 and you earn £5,600 from a part-time job, £5,000 from a pension and £5,000 from interest on your savings. That’d come to a total income of £15,600 which is equal to your personal allowance (£10,600) plus £5,000, meaning that you could register to receive your savings account(s) interest tax-free.

Even if you aren’t eligible to receive all your savings interest tax-free, you could claim back some of the tax paid, as long as some of your savings income falls within £5,000 on top of your personal allowance. For example, you earn £7,600 from a part-time job, £6,000 from a pension and £5,000 interest on savings, giving a total income of £ £18,600. You’d be able to claim back 20% tax paid on the first £2,000 of savings income, as your earnings of £7,600 + your pension of £6,000 + the first £2,000 of your savings income equals £15,600.

However, if you earn £8,600 from a part-time job, £7,000 from a pension and £3,000 from savings income, giving the same total income of £18,600, you couldn’t reclaim any tax on your savings income, as your income from employment and a pension comes to £15,600.

HMRC state that this tax regime is “to provide support to the lowest earners”. In my opinion, it’s aimed at pensioners, to allow them to get a fair amount of interest from savings without paying tax. I’m not convinced that the 0% income tax on saving income policy is logical, as, from 6 April 2015, everyone can save up to £15,240 a year into a Cash ISA and pay no tax on interest received.

Personally, I can’t see the justification for someone working full-time (40 hours a week) on the minimum adult wage of £6.31 who’d earn £13,125 a year with a personal allowance of £10,600, having to pay income tax at the basic rate of 20% on £2,525 of their pay, when a person over the State Pension age with the same total income of £12,525 but with £2,525 of that income coming from savings, would pay no income tax. The working person would also have National Insurance Contributions deducted from their pay, plus possible transport costs to get to work.

I reckon that many people won’t be aware that they could register to receive their savings income tax-free, or receive partial refunds. It’s not that easy to understand this tax policy and if people don’t either register or fill out annual tax returns, they won’t benefit from the 0% tax on savings income.

I think it’d be a lot fairer and simpler for the personal allowance to be higher for everyone, regardless of the source of their income.