Tuesday, May 28

The stealth tax that will leave Britain’s savers £100 million worse off


 

 

Interest rates may be up for the first time in a decade, but millions of Brits are about to take a hit elsewhere, as a ‘stealth tax’ on savers kicks in.

And the change is set to cost people saving for their future at least £100 million a year, the Chancellor has said.

In his Autumn Budget, Philip Hammond announced plans to freeze the so-called indexation allowance an inflation-linked tax break from January 2018, to raise £525 million for the government by 2023.

This means people with money in investment products such as endowments and whole of life insurance policies will be taxed on the full amount added to their pot each year rather than just the amount above the inflation rate.

On Wednesday the Chancellor said the move will cost Brits at least £100 million a year – adding that the Treasury was still trying to work out just how many policyholders would be affected.

He told MPs on the Treasury Select Committee: It’s getting up to £100 million a year. We are still working with insurers to get to the bottom of what the impact is.

But the change has since been criticised by insurers as a tax on ordinary people.

Former Pensions Minister Steve Webb said it’s not a tax on fat cats or City firms but on people who have done the right thing and made sacrifices.

Former SNP Deputy Leader Stewart Hosie challenged the Chancellor over the tax on Wednesday, asking why people with “modest savings” were being targeted.

Hammond said: There impact is on a small number of policyholders – about 20% of this [£500 million a year] burden of this change will fall on life assurers.

Hosie countered: “That’s getting up to £100 million a year and people bearing the cost of that will be people with very modest savings.

I hope this is reviewed.

What’s changing and how much of my money is at risk?

At present, when investments on products such as endowments and life insurance grow, tax is only paid on the ‘real’ return, stripping out the effects of inflation.

But Royal London says that under the government’s change, tax will be payable on the whole return, including anything which simply keeps pace with inflation.

The insurer believes this could affect up to three million of its own customers alone, most of whom stand to lose between £25 and £50 when their policy reaches maturity.

However, former pensions minister and director of policy at Royal London, Steve Webb says some could lose £100s.

Webb 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 policyholders 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. There is no reason why they should now face additional taxes simply because they have invested through an insurance policy.