Deflation and savings.

The RPI rate is -1.3% so a savings rate of 3% seems a very good deal. If the Conservatives keep their promise to abolish the 20% tax on savings accounts if they get in, it would be even better. ISA's would be obsolete.The downside is no inflation, debts are not diminished.

Reply to
mick
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It's about time someone did something about cash ISAs though. The fixed rates you can get on them are much poorer than on corresponding fixed rate taxable savings accounts, which means that the banks are in fact snaffling most of the tax benefits that were supposed to go to the savers.

Reply to
Norman Wells

It would, on that narrow view, but it's still a crap policy. The fact that the higher-rate is left untouched (They still can't resist adding the Brownian twist, can they?), means that anyone with earnings below the HR threshold, but with savings income straddling that threshold, will be suffering a marginal tax rate on their *earned* income of 60%.

Add in NI and you will have a marginal withdrawal rate of over 73%, after the promised increase.

It gives me no pleasure to say that I doubt very much whether George Osborne is remotely aware of this. Yet isn't he the one that said he believes we need 'flatter, simpler taxes'?

Add in the effect of means tested benefits, such as Child Tax Credit, and presumably the marginal withdrawal rate would be even more. (Can anyone say what this is? Could it take it over 100%?)

In fact Iain Duncan Smith has just been on the Radio 4 complaining of high effective marginal tax rates, though admittedly in a benefits context.

Arguing against the abolition of basic rate tax on interest is hard work, because supporters argue that some would be better off, while no-one would be worse off, so it must a Good Thing.

But once the cut (and the above anomaly) are in place, then the system has to be judged on its own terms, not against the prior system, which just becomes a historical irrelevance.

And of course some *are* worse off than if the cut was spread more evenly, or, better still, it went directly into eradicating some of the anomolies, many of which have been created under Gordon Brown.

Some people seem to think marginal rates are irrelevant. I disagree - they are the *true* rates merely disguised by complex formulations. As well as putting people off doing a bit extra, they can also tempt people to work less, as the extra leisure time appears so cheap.

If the justification is to incentivise saving, then why not target the money at raising the savings thresholds at which means-tested benefits start to be withdrawn? They're a disincentive to saving, so lets start there.

Or how about restoring the pre-1997 dividend tax credit treatment (and level) so that we have fair differentials between non-, basic- and higher-rate tax payers again? There are many more possibilities, surely.

And therein lies another problem. Stocks'n'shares ISAs are already largely obsolete for basic rate taxpayers (because you don't really get basic rate income tax relief on dividends anymore), but higher-rate payers can still benefit. Abolishing the 20% tax on interest will do the same for the Cash ISAs (although in contrast this will be due to getting relief both inside and out).

Once it is pointed out that the entire ISA scheme is of very little benefit to anyone other than higher- and super-rate taxpayers, I think we can guess what will happen, given in the current climate.

Reply to
Clifford Frisby

It doesn't really surprise me though. Any subsidy (such as a tax break), or any penalty for that matter, which is offered nominally to one party in a transaction, will probably end up being shared roughly equally between the two parties, as supply and demand re-balance in view of the subsidy.

I keep wondering how difficult it would be to create a system akin to the self-select stocks ISA, where you could use an wrapper provider (whom you would pay a fee) and then go shopping for ordinary savings accounts to place within the wrapper. The answer I invariably arrive at is 'very', but it would stop the current snaffling.

Reply to
Clifford Frisby

Another option might be to make bank interest a non-allowable expense for tax purposes, and tax bank interest income in the same way as dividends are taxed. That would reduce the incentive for businesses to finance themselves with debt capital rather than equity capital, and make them less likely to go bust in a downturn.

Reply to
Jonathan Bryce

That aberration could easily be repaired by ensuring that savings interest is counted first. So the savings income of the person in your example would *not* straddle the threshold, only his *earned* income would, thus ensuring that his marginal rate remained at 40%.

But then, I suppose, you would complain that the marginal tax on his

*savings* income (should it increase while his earned income does not) is 40%.
Reply to
Ronald Raygun

So they plan on charging HRT payers 40%, rather than, like with dividends, give them a tax credit which covers basic rate?

71.5%? New employees NI rate will be 11.5%. It's even more if you add employer's NI.

In some circumstances it could be. Generally a HRT payer will only get the family element of the CTC which is withdrawn at 6.67% over 50k. The rest is withdrawn at 39% but unless the family is very large or has high childcare costs it's usually all gone by the time income gets to the HRT threshold.

But anyway, the Tories were on about abolishing what they called "middle class tax credits" or something so that probably means the family element of the CTC.

The current lot justify it on the grounds that "the best off will gain most".

Exactly. Same is true for independant taxation.

True.

Or better - reduce the withdrawal rates. Otherwise it just encourages people to earn up to the limit and no more. Ideally, incorporate *all* benefit withdrawal into taxation!

But you do on corporate bond funds and the like, which you can have in a stocks and shares ISA.

Plus there's no need to declare anything on your tax return, it doesn't affect your tax credit claim, there's no CGT, it doesn't affect age allowances, so there are still several benefits of ISAs to basic rate payers.

They might stop new money going in but I doubt they'll start to tax existing ISAs.

Reply to
Andy Pandy

Yes but that option is simply not open to the taxpayer at the moment, and, I am quite certain it will not be made available as part of this proposed change either. He has to stack savings income on top of earned income for the purpose of allocating it into the bands.

You might as well say that that aberration could be easily fixed by ensuring that the tax rate on savings interest above the HR threshold is reduced to

20%!

I don't know why you suppose I would complain about that. Since the total income is above the HR threshold, and the HR is headlined as 40%, then 40% seems like the right marginal rate.

Reply to
Clifford Frisby

Yes, my mistake. I was mistakenly using the employers rate (12.8%) and then another 0.5% for the proposed hike. Actually I think the Tories are saying they wouldn't implement the 0.5% increase (as it 'affects too many people'), so I suppose I shouldn't even be adding that on as I am criticising another of their policies.

Thanks for the summary.

Isn't that bound to create some nasty spike in the marginal rate somewhere else? I though that the reason they went so far up the income scale was to try to avoid such effects.

Not sure I follow that!

Ah, I think I do now.

Well, I did say 'largely' for those sorts of reasons, but I do take your point.

Incidentally, BBC Moneybox put it to Osborne (off air) that the existence of the age allowance clawback meant many older basic rate payers would find that their effective rate on savings income was still non-zero, even under this wheeze. IIRC he denied this was true, but had to concede later that it was. What does that tell us?

Shame they didn't ask him about the 60% effect.

Reply to
Clifford Frisby

I wasn't thinking of it as an option the taxpayer could choose at will, but as a change to the govt could make to the current method.

There is no reason why he *has to* do it that way, given that he would have the power to change the rules.

Well, if his intention is to avoid said aberration, then it should be easily possible to implement either of those two options.

It might *seem* the right rate for someone whose combined income from both sources is above HRT, but it *isn't* the right rate if they *said* they would tax savings income below HRT at 0%. I supposed that you would complain about it because it is anomalous and misleading. :-)

Reply to
Ronald Raygun

No & no. The reason is spin - to be able to say 90% of families are eligible, so they retain a small part of the CTC (the "family element")until income gets to 50k. Eg if you have 2 kids the withdrawal rate for tax credits is 39% between about 6500 and 30k, then it's 0% between 30k and

50k, then it's 6.67% to about 58k when it's all gone.

If the family element was abolished then you'd just get rid of the 6.67% withdrawal band. If it was made subject to the same withdrawal rules as the rest of tax credits then it'd be 39% to about 31k (in the 2 kids example) then 0% (as it's all gone).

Hopefully they'll replace the whole bureacratic mess of tax credits with proper tax allowances, maybe with negative tax for those who don't earn enough to use the allowances.

Reply to
Andy Pandy

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