Bank of England rate cut should trigger tax reform

The Bank of England’s decision to cut interest rates to 0.25 per cent - the first move in the bank base rate since March 2009 - should give the government pause for thought over the personal savings allowance (PSA).

Nimesh Shah, partner at chartered accountancy firm Blick Rothenberg, said the PSA was “complex and unnecessary” and the downward move by the Bank of England today (4 August) highlighted the need to get rid of the PSA altogether.

The PSA was introduced in the 2015 Budget by the then chancellor George Osborne. It came into force in the current tax year (2016 to 2017).

Government has tinkered with allowances and rates and there are many unnecessary provisions which should be abolished to simplify the tax system Nimesh Shah

Previously, any savings interest was taxed at the same rate as income, but now all basic rate taxpayers will receive a £1,000 tax-free allowance, and all higher rate taxpayers will receive a £500 allowance.

Additional rate taxpayers (those with income over £150,000) are not eligible for the allowance.

Under the PSA, all savings interest will be paid gross.

However, Mr Shah said applying the Bank of England’s new base rate, a basic rate taxpayer would need £400,000 of savings to fully use the £1,000 PSA, while a higher rate taxpayer would need £200,000 of savings.

Mr Shah said: “I expect it is highly unlikely that someone with £400,000 of savings will be a basic rate taxpayer.

“In addition, those individuals with sizeable savings are likely to have taken advantage of their Isa allowances over the years, therefore a person would need such savings outside of their tax-free Isas to benefit from the PSA.”

He said over the past five years, the government has “tinkered with allowances and rates and there are a number of unnecessary provisions which should be abolished to simplify the personal tax system”.

According to Mr Shah, the PSA is one of several measures which the government, together with HM Revenue & Customs and the Office of Tax Simplification should look at scrapping.

He suggested that, in abolishing the PSA, the Government could replace it with an additional ‘top-up’ to a person who contributes a certain amount to an Isa.

Mr Shah commented: “The Lifetime Isa, which was announced at Mr Osbourne’s very last Budget, is offering just that whereby an eligible individual contributing up to £4,000 each year will receive a bonus of £1,000.

“The government would be wise to consider increasing the £1,000 incentive through abolishing the PSA, or introducing a new category of Isa incentive which would benefit the whole population.”

simoney.kyriakou@ft.com