Savers deserve better than the current impenetrable tangle of tax rules
It’s official: the tax rules on savings and investments are now so complicated that even the taxman’s own computers can’t get them right. A new paper from the Office of Tax Simplification (OTS) reveals that calculating the tax on our savings is one job the robots aren’t coming for quite yet: it’s just too convoluted. According to the report: “It is proving to be very difficult to create an algorithm that calculates the tax correctly in all circumstances.”
To take one small example of the complexity, those who make pension lump sum withdrawals are regularly charged too much tax, thanks to the application of emergency tax codes.
These emergency codes treat the one-off withdrawal as the first instalment of a massive regular income. As a result, too much tax gets carved off.
The OTS provides an example showing how a lump sum withdrawn to pay for a car could be unexpectedly slashed to a level where it was no longer enough to cover the purchase.
This excess tax does get paid back to you – eventually. The paper reveals that since the pension freedoms were introduced in April 2015, the taxman has had to pay back £37m on pension lump sum withdrawals. HMRC claims that repayment takes just seven days if you submit a claim, but those with experience say delays can last up to six weeks.
Absurdly, even though the personal savings allowance (PSA) means that 95pc of Britain’s savers do not have to pay tax on the money they put aside, the system is now so complex and its communication so poor that many “worry about the tax treatment of their savings income even when they do not in fact have anything further to pay”.
And the greater public awareness of Isas now means that many of those who choose to save cash in them may be losing out, as they don’t know that the PSA could protect their interest from tax outside an Isa, where better interest rates are available.
Part of the problem is our woeful levels of financial literacy. As a nation we score below the OECD average. And while anyone reading this is surely on the upper end of the financial literacy scale, the OTS bleakly observes that even British citizens who self-assessed their knowledge as high were only average when compared with people from more financially literate countries on objective tests.
But we need a tax system for the country we have, not one for an ideal population of accounting wizards. The OTS rightly criticises HMRC for “unclear or incomplete” communication and urges it to improve its guidance and make it easier to understand.
Helping taxpayers to navigate the tangle of current tax rules is not enough, though, if only because, given the level of financial understanding across the country, “even comparatively clear HMRC guidance in this area will be difficult
It’s not just the taxman who needs to work on his plain English skills. For many customers, too much of the communication they get from pension and investment firms is hard to follow.
That’s one of the motivations behind Telegraph Money’s decision to join with Boring Money and launch the Consumer Investment Awards.
We wanted to know who offered good customer service and value for money, who communicated well, which online services were best and which newcomers were making an impact.
So we asked you, the real experts, to share your experience with us.
Thank you to the thousands of readers who voted, and helped give the customer a voice.
We will present your feedback to the industry, at an event on Wednesday, with a full report to follow in next week’s section.
Britain has a lot of homework to do to improve its financial literacy