£841million tax raid on savings

Chancellor’s ‘stealth grab’ on long-term investments to hit nearly 12million Britons

MILLIONS of savers face a tax raid that could wipe nearly £850million from their investment plans, officials have admitted.

In a letter seen by the Mail, the Treasury has revealed that an obscure new tax on long-term investments will hit ordinary savers.

Experts described it as a stealth tax after Chancellor Phillip Hammond said during last November’s Budget the new measure would only apply to companies.

But those affected include 11.6million people who hold endowments, with-profits and whole-of-life plans at firms such as Axa, Aviva, Prudential and Standard Life. Most of these long-term investment deals were sold in a sales frenzy among insurers during the 1980s, 1990s and early 2000s. The plans can last 20 years or more and are relied on by savers to fund their retirement, pay off home loans or pay an inheritance to relatives.

The new tax, which came into effect at the start of the year, means every penny earned on these policies as an annual return will be subject to corporation tax at 19 per cent. Previously, annual profits were taxed only if they exceeded the rate of inflation.

So, for example, if the cost of living rose by 3 per cent a year – the current level of inflation – and returns came in at or below this figure, no tax was due.

If returns were higher, tax was deducted only on the portion of the gain above the inflation threshold. Now they face tax on the entire gain.

When the new tax was announced by Chancellor Philip Hammond last November, the Treasury said it would have ‘no impact on individuals or households’ and would ‘only affects companies’.

But Treasury officials now concede that savers will be squeezed as firms pass on the extra tax bill. A letter sent by a Treasury offi- cial to a taxpayer a month after the measure was announced admits there will be an impact, saying: ‘The impact passed on to individual policy holders is likely to be small. This impact will depend, amongst other things, on the amount of money policy holders have invested.

‘So, those that have invested smaller amounts of money will see a smaller impact on their policy.’

Figures calculated by trade body the Association of British Insurers (ABI) reveal that firms face costs of £841million over the next five years – twice the bill outlined by the Treasury.

Insurers say they will pass this on to customers, reducing the payouts savers can expect to receive. The ABI estimates that each policyholder could be up to £150 a year worse off and experts said the Treasury’s tax raid would be disastrous for hardpressed savers.

Pensions expert Baroness Ros Altman said: ‘Savers have had a tough time in recent years and losing a further £150 a year will be significant for many elderly savers. I understand the Government needs to raise extra revenue and its intention is to increase tax paid by companies. However, ordinary investors will also be paying more and this feels like a stealth tax because it was not explained properly at the time.’

Justin Modray of the consumer group Candid Money said: ‘Politicians like these taxes as they’re often seen as targeting the rich, but in practice they impact on almost all of us.

‘Higher tax on insurance company investments is especially painful since returns have often been poor due to greedy insurers creaming off very high charges. So this stealth tax just rubs salt into savers’ wounds.’

MPs said the Chancellor had made a mistake in thinking that the extra tax bill wouldn’t get passed on to customers. The SNP’s Alison Thewliss told a debate in the Commons this month the change would “have a considerable impact given that such people have relatively small savings”. ‘We are talking about 11.6million people – not a small number by any means,’ she said.

‘Those policies may represent a relatively small amount of money to the Government, but the change will have a significant impact for those people.’

Steve Webb, director of policy at insurer Royal London, said policyholders should not have to pick up the tax bill.

‘The only decent thing would be for the Treasury to exempt individuals from this new tax,’ he said. ‘There is no doubt that the Government has misled Parliament over this stealth tax.

‘The Treasury has now admitted in writing that this policy will affect individual savers.

The tax grab is yet another blow for savers, who have faced record low returns since interest rates were cut in 2009.

A Treasury spokesman said: ‘We are changing the system to correct an imbalance. We expect any impact on policyholders to be small.’

‘Not explained properly’

‘Investors will be paying more’