Budget tax move will hit savers, claims Royal London

Firm says that change will affect millions of people Treasury argues that adjustments correct imbalance

Millions of savers are likely to be hit by a Budget “stealth tax” that is set to raise hundreds of millions of pounds for the Exchequer, it was claimed yesterday.

Royal London, the mutual insurer, said the Chancellor had announced the freezing of “indexation allowance” for corporation tax in his Budget on Wednesday, which it described as an “apparently technical change” that could net the Treasury more than £500 million a year once fully implemented.

The firm said that its “detailed analysis” of the policy suggested that one group of “victims” of the tax loophole will be those who have savings products such as endowments and whole-of-life policies with insurance companies.

Under current rules, when these investments grow, tax is paid only on the “real” return, stripping out the effects of inflation. This tax is collected by the insurance firms and passed on to the government.

But from this coming January, tax will be payable on the whole return, including anything which simply keeps pace with inflation, Royal London noted.

The firm estimates that the changes could affect up to three million of its own policy holders and “many millions more” across the whole of the insurance sector. It is now calling for the policy to be reviewed and for implementation to be delayed while data is gathered on the full impact of the changes on small savers.

Steve Webb, director of policy at Royal London and a former pensions minister, said: “This is a stealth tax on millions of people who have made sacrifices and saved hard and are now penalised with extra tax.

“If the Treasury did know that this would be the impact of the tax then it should have been honest about the effect on savers. But if it did not realise that this would be the consequence then it should urgently review the policy.

“Most of these policy holders are on modest incomes and would not pay tax on their investment growth if they invested directly because of the generous annual allowances for capital gains tax.”

A Treasury spokesperson said: “The current system of indexation allowance provides benefits to companies that aren’t available to individuals. The changes in this Budget correct an imbalance in the system by removing an outdated measure.

“This is a tax incurred by the insurance company itself and most fund managers can choose not to pass on any additional costs to their clients.”

sreid@scotsman.com