Make All Savings Interest Tax Free for Basic Rate Taxpayers

Written by Karen Bryan

coinstackIn my opinion, the UK Government should have taken a firmer hand with cash ISA providers.

I’d like to have seen cash ISA providers being compelled to offer the same rates of interest on all their savings accounts, whether standard or ISA savings accounts, However, I can see how that would probably backfire, with providers merely reducing the higher rates offered on their standard savings account to the lower level offered on Cash ISA accounts.

The other change I’d like to have seen implemented was for all Cash ISA providers are forced to offer flexibility on their instant access ISA accounts. This allows savers to dip in and out of their accounts. with the option to replace any withdrawn funds by the end of the current tax year. This is of most utility on instant access ISA accounts, as nearly all fixed rate Cash ISAs have penalties for early withdrawals or closure. At present, only a few financial providers offer flexibility on their Cash ISAs.

Now I can see that bringing in legislation to ban providers from offering lower rates on interest on Cash ISA accounts, and making flexibility mandatory, could well lead to fewer providers offering Cash ISAs, in addition to the lowering of rates of interest on standard accounts.

This brings me to the conclusion that the best way forward is to scrap income tax on interest for basic rate tax payers.

This would give savers access to higher rates on interest on standard accounts. As many standard instant access savings accounts allow you to dip in and out of the account, flexibility wouldn’t be much of an issue.

Basic rate taxpayers already have an annual personal savings allowance of £1,000, plus an annual tax-free ISA allowance of £15,240. Basic rate taxpayers with income from employment, benefits, pensions and interest on savings of up to the annual personal allowance of £11,000 can earn an additional £5,000 tax-free interest.

Why on earth does the UK tax system have to be so complex?