The Office of Tax Simplification (OTS) has published its report on possible changes to simplify the taxation of savings and investment income. The report makes several recommendations, including the ‘radical’ option of removing the differential tax rates for dividend income, but stresses that any changes should not be carried out piecemeal.
The OTS acknowledges that the current system of reliefs and allowances ‘works well for most taxpayers’, with 95% of people having no tax to pay on savings income. Nevertheless, the OTS sees the way the various reliefs and allowances interact as a source of complexity. There is greater awareness of ISAs than the personal savings allowance and the dividend allowance introduced from April 2016, which may confuse people making decisions about where to save their money.
Other areas the report highlights as being not well understood are the tax treatment of pension fund withdrawals under the new pension flexibilities, and the rules on calculating gains on either full or partial surrenders of life insurance policies.
The report suggests possible alternative approaches for simplifying savings rates and allowances. These include:
specifying the order in which allowances are to be deducted;
making the personal savings allowance and the dividend allowance true allowances or exemptions rather than a nil rate;
‘more radical’ options, such as exempting savings interest completely for certain groups of taxpayers, or removing the differential tax rates for dividend income; and
amalgamating the starting rate with the personal savings allowance.
Recommendations for further work on other areas include:
introducing a personal tax ‘roadmap’, setting out a plan for consolidation of savings income rates and allowances, together with improved guidance;
making the personal savings allowance available to trusts and personal representatives;
considering further flexibility for ISAs, such as allowing partial transfers of money in-year, and a review of the rules on early withdrawals from lifetime ISAs;
introducing improved guidance on pension withdrawals and the use of emergency tax codes for personal pension lump sum withdrawals; and
reviewing the rules on partial withdrawals from life insurance bonds, once the new system of relief for disproportionate gains, introduced in F(No. 2)A 2017, has bedded down.
The Office of Tax Simplification (OTS) has published its report on possible changes to simplify the taxation of savings and investment income. The report makes several recommendations, including the ‘radical’ option of removing the differential tax rates for dividend income, but stresses that any changes should not be carried out piecemeal.
The OTS acknowledges that the current system of reliefs and allowances ‘works well for most taxpayers’, with 95% of people having no tax to pay on savings income. Nevertheless, the OTS sees the way the various reliefs and allowances interact as a source of complexity. There is greater awareness of ISAs than the personal savings allowance and the dividend allowance introduced from April 2016, which may confuse people making decisions about where to save their money.
Other areas the report highlights as being not well understood are the tax treatment of pension fund withdrawals under the new pension flexibilities, and the rules on calculating gains on either full or partial surrenders of life insurance policies.
The report suggests possible alternative approaches for simplifying savings rates and allowances. These include:
specifying the order in which allowances are to be deducted;
making the personal savings allowance and the dividend allowance true allowances or exemptions rather than a nil rate;
‘more radical’ options, such as exempting savings interest completely for certain groups of taxpayers, or removing the differential tax rates for dividend income; and
amalgamating the starting rate with the personal savings allowance.
Recommendations for further work on other areas include:
introducing a personal tax ‘roadmap’, setting out a plan for consolidation of savings income rates and allowances, together with improved guidance;
making the personal savings allowance available to trusts and personal representatives;
considering further flexibility for ISAs, such as allowing partial transfers of money in-year, and a review of the rules on early withdrawals from lifetime ISAs;
introducing improved guidance on pension withdrawals and the use of emergency tax codes for personal pension lump sum withdrawals; and
reviewing the rules on partial withdrawals from life insurance bonds, once the new system of relief for disproportionate gains, introduced in F(No. 2)A 2017, has bedded down.
