With all eyes on the stamp duty exemption for first-time buyers announced in the Budget last week, savers might have missed a new Budget stealth tax.
According to mutual insurer Royal London, this measure is set to raise hundreds of millions of pounds for the Treasury, affecting millions of savers.
The stealth tax in question is a freezing of ‘indexation allowance’ for corporation tax.
It looks like a minor technical change at first glance, but could be set to raise more than half a billion pounds in additional tax revenue when fully implemented.
Analysis carried out by Royal London has identified a group of savers who will be worse off due to the tax change.
Individuals who hold savings products such as endowments and ‘whole of life’ policies with insurance companies are likely to suffer higher tax charges as a result.
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 companies and passed on to the Treasury.
But from January 2018 tax will be payable on the whole return, including anything which simply keeps pace with price inflation.
Royal London is estimating that this technical change could impact up to three million of its own policyholders and many millions more across the country.
This is despite the official Treasury documents accompanying the announcement claiming it has ‘no impact on individuals or households’.
As a result of its analysis, Royal London is calling for the policy to be reviewed and for its implementation to be delayed so data can be gathered on the full impact for small savers.
Commenting on the analysis, Steve Webb, Director of Policy at Royal London 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.
There is no reason why they should now face additional taxes simply because they have invested through an insurance policy.
If you have an insurance-related investment like an Investment Bond, this could be a good time to review your overall financial planning.
Various changes to tax rules and allowances in recent years have made some investment tax wrappers less favourable than others.
Do get in touch if you would like to review your personal finances and ensure any plans you have remain suitable.
