The planned replacement of TESSAs and PEPs by Individual Savings Accounts has not been well received by those most affected.
The government may believe the numbers of people who would lose out by the #50,000 limit is relatively small and not politically contentious.
But, for everyone who has #50,000 of savings, there are ten people who aspire to it – even though they have little chance of reaching that level of savings.
The government has tried to portray it as simply a redistribution of tax relief to widen its appeal to lower income groups and encourage more savings. They suggested it would be revenue-neutral.
Closer analysis suggests otherwise. Higher income groups, who benefit from 40% tax relief, have a greater propensity to save and inevitably benefit from the existing regime. Some people have reorganised their savings accordingly and now feel cheated.
In contrast, there is little evidence to suggest millions of people on low incomes who currently save very little will be induced to change their habits by the ISA regime. There is less benefit to people on standard rate and none to people who pay no tax.
The government’s planned 10p tax rate will yield little benefit to small savers. The extra tax relief to people on the lowest rate of tax on interest on the maximum cash holding of #1,000 will total just #6 a year – hardly a big incentive.
The Treasury has been forced to admit that the new ISA regime is likely to attract less tax relief than would have been the case if TESSAs and PEPs had continued.
It was estimated that the cost to the Treasury in tax relief from TESSAs and PEPs would have risen from #1.25bn to #1.7bn by 2001. A Treasury official admitted to a House of Commons library economist that ISAs would ‘follow a flatter curve’ and thus save the Treasury money.
In the next Parliament, when the new regime will be in full force, it will cost #3bn to #5bn less than would have been the case had the present regime continued.
Raising the threshold for those who have already reached the #50,000 limit to say, #70,000, would cost the government substantially less than it is saving.
Malcolm Bruce is Liberal Democrat MP for Gordon, and the party’s spokesman for Treasury affairs.
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