The Bank of England’s recent decision to further reduce the base rate to 0.25 per cent has sparked debate among chartered accountants surrounding the Personal Savings Allowance. Although it was only instituted in April 2016, many people are of the opinion that it should now be abolished.
How it Works
The Personal Savings Allowance means basic-rate tax payers are exempt from paying tax on the first £1,000 worth of interest they make on their savings. Higher-rate tax payers are exempt from the first £500.
At an interest rate of just 0.25 per cent for the allowance to be fully utilised, basic-rate tax payers would need savings of £400,000, and higher-rate tax payers would need £200,000. It is unlikely that a basic-rate tax payer will have accumulated such a large figure, so it seems the allowance has become an unnecessary piece of legislation.
In contrast, interest paid on debt remains high, although it’s possible to arrange an IVA through companies online.
More evidence can be seen when studying recent data. Currently, ISAs with the most profitable rate of interest would earn the account holder less than £100, even when taking advantage of the full £15,240 of their annual allowance. This isn’t even enough to hire a Car Leasing Gloucestershire company to let you have a car to travel to and from work. Although you can get some amazing deals from links including mphvehiclesolutions.co.uk Furthermore, as financial expert Nimesh Shah points out, those with larger savings are highly likely to have used their ISA allowance over the years and as such would need additional savings on top of this in order to benefit from the Personal Savings Allowance.
It would seem that the tax system has become unduly complex and confusing as a result of this and other provisions. The last few years have seen the Government making changes to income tax rates and personal allowances that have, according to experts, left room for many provisions to be scrapped so the system can be simplified. This includes not only the Personal Tax Allowance but also a number of other measures, which HM Revenue and Customs and the Government should look into.
Given the low interest rates, the lack of signs of them rising, and the speculation of a further rate cut, it would make more sense for the Government to introduce a blanket exemption on income tax paid on any interest generated on savings for all bank accounts in the UK.