0% Starting Rate For Savings

etienneg

polymaff wrote: »

It is an answer - just one you don't agree with. It also happens, whether you agree with it or not, to be the reason given by HMT for relieving taxation on taxable savings income.

Well, if it is an answer it's one I don't understand. As I'm genuinely seeking enlightenment about this, could I please have one more go at asking? Maybe there's something I'm missing.

When I earn money I pay income tax on it. Say this leaves me with £1,000. I fully accept that this means that that £1,000 has already been taxed, and it's easy to see the argument against taxing it a second time.

Now I put that £1,000 in a savings account earning 1.5%pa interest. After one year I am paid £15 interest. This £15 is income and has never been taxed. Therefore (assuming we accept the necessity for taxation), it's not easy to see why it shouldn't be taxed.

If there is 20% tax to pay on it (£3), I then have £1,012 in my account, all of which has been taxed. At the end of a further year I am paid £15.18 interest, which by the same logic would be subject to tax. As this continues, no money is ever taxed twice. All the money is taxed just once - at the point where it is income.

If, however, the £15 is not taxed, I have £1,015 in my account of which £1,000 has been taxed and £15 has not. As this continues, there is more and more money that has never been taxed. This is the bit that (as I see it) needs explanation - why it is thought OK to tax money earned by employment but not money earned as interest (assuming otherwise identical financial situations).

If there really is logic in this, I would like to understand it. polymaff, if you do understand it (rather than just knowing that's the way it is), could you give an explanation in basic terms, please? Also, if you have a link to the HMT reason you allude to, this would be much appreciated.

uknick

I think the political angle is being ignored here.

From what I can recall, at the time the savings 0% rates were introduced there was some debate about how people, mainly pensioners, living off their savings were being penalised by very low interest rates and then getting hit by income tax. The government at the time decided to introduce the 0% bands to help with this. I think the fact the announcement was made in the run up to an election was a pure coincidence

polymaff

etienneg wrote: »

When I earn money I pay income tax on it. Say this leaves me with £1,000. I fully accept that this means that that £1,000 has already been taxed, and it's easy to see the argument against taxing it a second time.

Now I put that £1,000 in a savings account earning 1.5%pa interest. After one year I am paid £15 interest. This £15 is income and has never been taxed.

Suppose that your candidate earns £1,250 and pays basic rate tax on it - giving the £1,000 that he then saves. At the end of the year he receives, as you say, £15 in interest.

Now suppose he wasn't taxed on that £1,250. Then he could maintain his lifestyle and save the £1,250, which would earn him £18.75 in interest.

So the taxation of the sum invested inevitably trickles down onto the interest subsequently earned - ad infinitum.

[Deleted User]

polymaff wrote: »

It is an answer .

It may indeed be an answer, but not necessarily to the question being asked by the OP. I think you are missing the point that he is making which is a completely valid and logical point.

This principal can be further extended that person B is gaining an extra £5000 of tax 'allowance' due to a different source of income. Similarly, person B would in turn be losing when compared to person C who is earning an extra £2000 in dividend income. If person B's income is £18850 he will pay tax on the £2000 which person c would not because his £2000 is earned through dividends. For simplicity, I'm ignoring the PSA

[Deleted User]

phillw wrote: »

Person A will become a burden on the state when they retire, Person B won't.

Or perhaps another angle is that person B will pay the 'deferred' tax as IHT:beer:

polymaff

[quote=[Deleted User];75588459]It may indeed be an answer, but not necessarily to the question being asked by the OP. [/QUOTE]


It was a brief, but relevant reply, amplified in the post I put up whilst you, maybe, were busy typing the above.


Your thoughts on that post?

etienneg

polymaff wrote: »

Suppose that your candidate earns £1,250 and pays basic rate tax on it - giving the £1,000 that he then saves. At the end of the year he receives, as you say, £15 in interest.

Now suppose he wasn't taxed on that £1,250. Then he could maintain his lifestyle and save the £1,250, which would earn him £18.75 in interest.

So the taxation of the sum invested inevitably trickles down onto the interest subsequently earned - ad infinitum.

polymaff: What you say here is quite correct, as far as it goes, although the last sentence is rather vague. Let's apply what you say to the two people in my example and see where it leads.

To recap:
Person A has no savings and works to earn £16,850. He will pay £1,000 in tax.
Person B has huge savings that produce £16,850 interest and earns nothing. He will pay no tax.

So A has £15,850 to live on. To maintain the same standard of living, B spends the same on living expenses. But B has £1,000 left which he can add to his already huge savings pot, which in future will earn him even more interest.

polymaff: The effect of taxation on the original sums has had the effect of making the richer person (B) even richer, leaving A in the same poor state. Now my arguments are about logic, not politics, so you may or may not think this outcome is good. But I wonder if you were really putting this forward as an answer to my question?

uknick has provided an answer from a political perspective. I agree that this cannot be ignored in the wider context - indeed, it may well be the overriding factor. In my view, tacking on small changes in this fashion to supposedly address particular issues just ends up producing more anomalies. It certainly adds complexity, which costs us more in HMRC time, not only implementing the change but answering the extra queries generated by the complexity. And when other small changes are tacked in addition ....

polymaff

There are many, many ways in which the same total taxable income can be assessed to tax. Write to your MP if you think that the particular case you present has some merit to it.

Just don't waste your time trying to convince anyone that interest derived from taxed income is untaxed.

etienneg

polymaff wrote: »

Just don't waste your time trying to convince anyone that interest derived from taxed income is untaxed.

I'm not wasting my time. Neither am I doing what you say above. I asked a question - if anyone could explain a LOGICAL reason for the anomalous situation I presented. In my opinion, neither you nor anyone else has provided such an explanation, so I conclude it wasn't just me missing something. Others reading this thread are (of course) free to reach a different conclusion.

Thanks to all who have contributed.

[Deleted User]

polymaff wrote: »

Just don't waste your time trying to convince anyone that interest derived from taxed income is untaxed.

Polymaff - I think you're missing the whole point. I do not see anything where Etienneg is saying that interest derived from taxed income is untaxed.

The whole point he's making is that when you compare the tax position of person A with person B, the latter appears to be better off by £1000 simply because he is able to offset his savings income by a further £5000 of allowance. Person A is not able to take advantage of this savings allowance. Hence his statement that the rich get richer because the nil rate savings allowance, the PSA, dividend allowance, CGT, all these are perks that only people with savings/investments can take advantage to save tax.

I'm not saying that I agree or indeed disagree with how things are, but at least I can see the OP's point.