The Government’s new savings allowance is an excellent idea but needlessly complex in its implementation says the Low Incomes Tax Reform Group (LITRG).

The new allowance will replace the deduction of income tax at source from savings interest. LTRG believes many taxpayers will really struggle to understand:

  • The operation of the new tax free savings allowance.
  • How it interacts with the starting rate for savings and the new tax-free £5,000 dividend allowance all three of which are essentially nil rate bands of tax that operate differently from one another. This is not straightforward and those most confused with the raft of changes may include people with incomes that fluctuate year to year or those who find themselves within the higher rate band for the first time after a pay rise or other change.

LITRG worries that unrepresented taxpayers will not be aware of the need to check the level of their savings income, and not understand how to work out the tax rate that applies. They may also not realise they need to keep HMRC up to date with changes to the value of their savings or risk sanctions for a failure to notify. A related concern is that many taxpayers will feel the different levels of savings allowance result in ‘arbitrary and unjust’ results because of the mechanics of how the savings allowance is worked out; for example, taxpayers may lose £500 of savings allowance if they are pushed into the higher rate tax band by just £1.

As well as pushing for greater public education than at present about the changes, LITRG has asked the Government to consider whether the savings allowance should operate along similar lines to the new dividend allowance as its operation is simpler to explain and consider. LITRG also suggests a name change to the savings allowance.

Anthony Thomas, LITRG Chairman, said:

“The highly complex operation of the savings allowance must be addressed to improve its clarity and avoid people feeling that they face arbitrary and unjust tax bills. A savings allowance that works similarly to the dividend allowance would potentially be much simpler to understand and use and seriously should be considered.

“It was a mistake to drop the word personal from personal savings allowance, which creates potential confusion with individual savings allowance (ISAs) and self-assessment (SA). It would be more transparent and simpler to term the savings allowance as a zero tax band rather than describing it worryingly and misleadingly as an allowance."


We agree, although it seems from our inbox that many accountants are also baffled too. We have created guides to each of the different allowances. It will be interesting to see how many taxpayers manage to cope with the savings allowance and the new dividend tax (from April 2016) and the retriction on buy to let finance (from 2017).