George Osborne’s general election Budget last week was hailed as relatively quiet and sober.
He had pledged “no gimmicks, no giveaways” and that later framed interpretations of what he delivered – more of the same, albeit with a slight relaxation of the previously planned austerity measures in the next parliament.
But those interpretations were wrong. Mr Osborne handed out a whopping £1,000 tax-free savings income limit, which will come in very handy for income-starved savers. That’s what I call a giveaway.
“People have already paid tax once on their money when they earn it. They shouldn’t have to pay tax a second time when they save it,” he said at the despatch box.
Quite so.
Let’s put this giveaway into context. Newbury Building Society currently pays a 2.1 per cent variable rate on its instant access savings account, with no upper savings limit and just a £3,000 cap on the amount that can be saved annually.
In order to max out your £1,000 annual tax-free income limit you would have to have £47,619 in the account. That is more than three times the current Isa limit of £15,000.
Unfortunately if you’re a higher-rate taxpayer, as most of your clients probably are, the new tax-free income limit falls to just £500. But that means a client could still save £23,809 and pay no tax at all on their income.
Previously that £500 of income would have fallen to a paltry £300 due to their 40 per cent income tax.
Sadly those lucky few who earn more than £150,000 will not be able to benefit from the scheme.
Cash just became far more attractive overnight, and when interest rates begin to normalise in the next few years this giveaway could see it start to genuinely compete with investments once again as an income source.
Higher-rate investors will be able to hoard their £23,809 in cash accounts and pump a further £15,000 a year into a cash Isa, and receive all the income tax-free.
Isas will continue to serve a purpose for investors in stocks and shares, offering as they do tax-free income and capital gains, but most cash savers will probably not bother with them when the new rules arrive in April 2016.
The problem with all this, of course, arises when inflation returns to normal levels. UK inflation in January was just 0.2 per cent, thanks largely to the oil price falls, meaning even the low returns on cash accounts represent real-terms gains.
But if inflation returns to the UK economy, then this tax break could leave investors losing money in real terms in their cash accounts, lured there by the prospect of tax-free income.
If Mr Osborne really wants to help savers grow their wealth, then has the time not come for them to be given extra tax breaks on investments too?
