Well-off Brits are living in a savings paradise. There is almost no need to head off to Panama or the Caymans when Britain itself is such a tax haven. You may not think this, given the miserably low interest rates on savings accounts, but Brits – or, to be more accurate, Britain’s upper-middle classes, because few others have the money – get access to more tax breaks than virtually anyone else in the developed world.
Take the new personal savings allowance (PSA). The first £500 of savings interest is now tax-free if you are a 40% taxpayer. This roughly equates to zero tax on the first £35,000 or so of savings balances. It’s worth more to a lower-rate taxpayer, who can shield £70,000 in savings from tax, but show me someone on average earnings who has that much in savings and I’ll show you a junior doctor who supports Jeremy Hunt. The truth is that the main beneficiaries of the new PSA will be the already well-off.
The same goes for Isas. From next year you can put £20,000 into an Isa and avoid tax. That’s £40,000 for a couple, adding up to £200,000 over just five years. Let’s say the money is put into a bond fund yielding 4% a year. That means a couple on a high income can earn £8,000 a year in interest without paying a penny in tax.
Above the PSA and Isa is the alphabet soup of specialised schemes, such as VCTs, EISs and SEISs, which give people with up to £200,000 spare a wodge of income tax rebates and dividend tax exemptions. And let’s not forget that even if the well-off don’t use an Isa or VCT for their investments, there is still the £11,100 profit that can be made without liablilty for capital gains tax. Were that not enough, the government has just slashed the tax rate on profits above that £11,100 limit from 28% to 20%.
Great, you might think. What’s not to like about encouraging saving and investment? True – but when the well-off complain about taxes, just look abroad to see how extraordinarily generous the situation in the UK reall is.
Take our nearest neighbour, Ireland. All savings accounts have a walloping 41% tax deducted at source, called rather imaginatively “Dirt” (deposit interest retention tax). There is no equivalent to the Isa, with about the best you can get being Post Office bonds paying 1% tax-free.
France has its Livret A accounts – there are around 40m of them in existence – which are tax-free, but only up to a maximum of €22,950 (£17,900). Compare that to stories of the lucky few in Britain who are already “Isa millionaires”. What’s more, interest paid is just 0.75%, worse even than our Isas.
Germans have a workplace savings scheme, the Vermögenswirksame, but that’s about it. Savings accounts generally have a withholding tax applied, of around 26%-28%. In Spain, savings are taxed at 19% on the first €6,000, rising to 23%. In the US there are various tax breaks on workplace savings, with employees able to place part of their salary gross into a scheme, but Americans look at our tax breaks with wonder. Australia is so keen to make people save into pension “superannuation” schemes that pure bank deposit accounts receive no special breaks.
Now, classical economics would say that with all these tax breaks and incentives Brits should be among the biggest savers in the world. But we’re among the worst. British workers save less than 5% of their incomes; German workers save twice that amount. Six out of 10 people in Britain don’t even have an Isa. Those who did open one in 2014-15 put in just £6,000 on average.
The truth is that the huge new allowances benefit a tiny number of people. Income distribution is so skewed in Britain that only the very well-off can, and do, use them. Last year, Isa tax relief cost the Treasury £2.6bn. I’m not arguing for it to be scrapped, but let’s make it clear who the winners are here.
