This year, the Chancellor has decided that we will all get a £1,000 tax allowance on our savings if we are basic rate tax payers, anything over this being subject to the standard rate of income tax. “Great” you think. “I’m going to pay less tax on my savings interest!”
Well as Francis Urquart once famously said “You might very well think that” but in this case, you’d be wrong. You’re actually going to be paying more tax. “What?” I hear you yelling. “How can this be?”. Well, I’ll explain :
Currently, there is a 10% band for savings interest up to £2,885 so on the first £2,885 you pay tax of £288. With me so far? Good.
Under the new regime you pay no tax on the first £1,000. So far, so good. But then after the first £1,000 you pay tax at 20%. This means that you pay 20% on £1,885 (£2,885 less £1,000) which amounts to £377 – an extra tax payable by you of £89
Brilliant isn’t it? Trumpet the additional allowance to encourage you to save and then increase the tax on the interest when you do. This is a move of which the Machiavelli of stealth taxes himself, Mr Gordon Brown, would have been truly proud!