Call to axe tax for elderly savers

TAX could be axed on savings interest for pensioners and basic-rate taxpayers under proposals to simplify the system.

Most pay no tax on interest they earn on savings but the system is so complex that at times even HM Revenue and Customs fails to get its calculations right, the Office for Tax Simplification said.

All basic-rate taxpayers currently have a £1,000 tax-free personal savings allowance. It is £500 for higher earners.

There are a number of other allowances exempting savers from tax on the interest they earn, including the £5,000 starting savings rate for lower earners.

But the OTS, an independent Treasury adviser, said in a report that all the different rates and allowances mean it is very difficult to calculate the tax correctly in all circumstances.

One of its suggestions for simplifying the system was to exempt savings interest completely, either for basic-rate taxpayers only, for individuals with total income below a certain threshold, or for individuals over pension age.

It said: ‘This is clearly a radical option and would come at a potentially significant cost to the Exchequer, which has not yet been quantified.’

Rachel Griffin, of the investments and pensions company Old Mutual Wealth, said the tax system was ‘something like Frankenstein’s monster… [with] numerous bolt-ons’.

She added: ‘The issue with the savings industry is not that it isn’t working but that, in some respects, it’s easier to take on debt than ascertain the most tax efficient way to save.’

Steve Webb, of the pensions firm Royal London, said: ‘The system is run for the convenience of HMRC, not the taxpayer. The sooner HMRC works with others to come up with a fairer and simpler system, the better’.

A spokesman for the Treasury said ‘95 per cent of people pay no tax at all on their savings income thanks to our recent interventions’.