Revealed, secret £1.8bn Budget tax raid on 10m savers

MILLIONS of savers will be hit by a £1.8billion stealth tax raid buried in the small print of the Budget papers.

Up to ten million people will be squeezed under new rules that target those who put cash in long-term savings plans offered by insurers.

The rule change hits savers who hold endowment, with-profit and whole-oflife policies. These are popular plans used by families to save over ten or 20 years for their old age or for paying off home loans.

Obscure rules in the Budget reveal that these investments will all be hit with a new tax bill.

James Daley, of the campaign group Fairer Finance, said: ‘Yet again savers are under attack at a time when they should be supported.

‘It’s unfair to move the goalposts and remove tax advantages on long-term investments, especially when savings rates are at extreme lows and banks refuse to offer reasons to save.’

The stealth savings raid was uncovered by the insurance company Royal London, which realised a tweak in the Budget would hit three million customers. It is thought as many as ten million in total could be affected at companies such as Axa, Aviva, Prudential and Standard Life.

It hits regular savings plans called endowments and with-profits policies – both long-term investment plans – and whole- of-life insurance policies that typically pay out on death.

Currently, profits on these policies are exempt from tax on any annual returns that match or fall below the rate of inflation.

So, for example, if the cost of living rises by 3 per cent a year – the current rate of inflation – and returns come in at or below this figure, no tax is due. If returns are higher, savers have tax deducted on the portion of the gain that was above the level of inflation.

This is a tax levied on the company, and so incurs corporation tax. However, insurers have always paid for it by deducting it from savers’ funds. But under changes to be introduced in January, the taxman will charge the corporation tax of 19 per cent on every penny that savers earn, regardless of the level of inflation. Again this will be passed on to savers.

Budget documents show the Treasury will rake in up to £1.77billion extra over the next five years as a result of the move. Former pensions minister Steve Webb, now a director of Royal London, said: ‘Either the Chancellor knows what he’s doing and needs to come clean about how it will affect people or he genuinely didn’t know the extent to which this would impact ordinary people, in which case he should rethink the policy.

‘This is a classic stealth tax – it raises lots of money for the Treasury but is tucked into the Budget in a way that few people understand it.’

The tax grab will be a fresh blow for savers who are already suffering as banks fail to pass on this month’s rise in interest rates.

The Bank’s base rate went up by 0.25 percentage points three weeks ago but just one in six savings accounts has followed suit.

And figures released yesterday showed a record £1.5billion was withdrawn from cash Isas in October as savers frustrated with rockbottom rates quit their accounts.

The Treasury insisted last night the policy will have no impact on individuals or households and will only affect insurance companies.

But the Association of British Insurers, the industry trade body, said customers will ‘inevitably’ receive reduced payouts as a result of the measure.