Why is interest on savings taxed?

Milarky

dunstonh wrote: »

Pensioners already get an increased personal allowance that will be close to 10k p.a. each in a few years. That allows a couple to earn £20k a year with no tax to pay. Isn't that good enough?

Does unearned income (like interest on savings) affect the 'clawback' of the allowance or does the clawback only apply to 'earned' income above the threshold please?

Going back to the OP: they tax savings because they need the money it raises to pay for things (some having more public support than others)

Remember that at present the 10% rate of tax is set to remain in effect on savings when it disappears from earnings next year (see here)

Notice that the government has not said what the personal allowance will be in 2008-09 (currently £5225) when they could perfectly well have announced this figure at the time of the last budget (which did talk all about the other measures due in a years' time) I suspect they will try to raise the personal allowance by a more than inflation next time - to partly compensate for the loss of the 10% on earned income - but won't raise it by as much as the £1115 needed to make this good.

But the bottom line is that savings are being privileged compared to earnings: from next year a 10% starting rate compared to 31% (don't ever forget National Insurance is a tax on earnings also).

dunstonh

Does unearned income (like interest on savings) affect the 'clawback' of the allowance or does the clawback only apply to 'earned' income above the threshold please?

Interest on savings does reduce the age allowance if total earnings are over £20,900. The main exceptions to this are ISAs and Investment bonds where income/interest on those doesnt exist for personal income tax. Although if the top slicing calculation on the bond in the year of encashment took them above it, that would count as taxable income (only against the age allowance as it is considered tax paid for a basic rate taxpayer)

dealsearcher

Prudence seems to be a favourite word of our new prime minister - until it comes to tax on savings. Then prudence doesn't pay.

longforgotten

Why should they be exempt?

Pensioners already get an increased personal allowance that will be close to 10k p.a. each in a few years. That allows a couple to earn £20k a year with no tax to pay. Isn't that good enough?

There is also the £7k a year ISA allowance so its not as if the opportunity to move more into a tax free environment doesnt exist

I didn't mean that I thought that pensioners should be exempt from tax on interest, just that many pensioners do think they should be. Mostly because they have worked all their lives and then get taxed on the interest on their savings. They are just not up to speed with present day, and the various ISA'S etc. Probably still pay everything by cash, off to the post office ...........

wayoflife

ctm wrote: »

Of course you can't. You haven't actually paid any!

It's a tax credit, not tax paid.

if this is correct and you are recieving tax credit you should be greatful that you get anything at all... as tax credits should only be an extra allowance from tax, not pay outs, the words tax credit are wrong and the whole system has to be re-evaluated

dealsearcher

longforgotten wrote: »

I didn't mean that I thought that pensioners should be exempt from tax on interest, just that many pensioners do think they should be. Mostly because they have worked all their lives and then get taxed on the interest on their savings ............

Hence my comment. Our previous Chancellor, now the PM, always talked about prudence. What could be more prudent than saving for your old age so that you didn't have to rely on the state? But no you get kicked in the wallet by having to pay tax on your 'prudent' savings! You may as well just get in to credit card debt and live the good life.