Deduction of income tax from savings income: implementation of the Personal Savings
LITRG has responded to the HMRC consultation document on the implementation of the Personal Savings Allowance (PSA), which will be introduced and take effect from 6 April 2016.
LITRG welcomes both the introduction of the PSA and the cessation of the Tax Deduction Scheme for Interest (TDSI), which will take effect from the same date. Not only do these changes mean that the majority of savers will no longer pay income tax on their bank or building society interest, but in addition, they will neither have to register a form R85 nor complete a form R40 in order to receive gross interest or claim a refund of overpaid tax on savings income respectively. Cessation of TDSI tax deduction arrangements will automatically give the correct result in the majority of cases, which is welcome for unrepresented taxpayers, but also for HMRC, for whom it reduces administration. We note that there is a sting in the tail for some taxpayers who make gift aid contributions and not having the benefit of the tax credit. These people will now be liable to an unexpected tax liability.
LITRG also sound a note of caution over possible increased complexity for some low-income taxpayers. Despite the introduction of the PSA, and the retention of the 0% starting rate for savings band, some individuals (including those on low incomes) will receive savings income on which they have to pay tax. There is currently low awareness of the need to notify HMRC about savings income; the changes being made will lead to basic rate taxpayers being in a position where they may have a responsibility to notify HMRC about savings income. HMRC need to carry out work to raise awareness of taxpayer duties in relation to tax.
LITRG point out that excellent communications will therefore be essential to ensure taxpayers understand the changes, otherwise HMRC, banks and building societies are likely to find themselves inundated with queries from individuals concerning their savings income. In particular, there is likely to be confusion among individuals who hold both taxable sources of savings income and ISAs. We also note that whichever option(s) is chosen, it is essential that clear guidance is produced for individuals, so that they can understand their tax liability and their responsibilities.
The LITRG response can be found here.