Budget loophole could hit savers, says Royal London
In the Autumn Budget, the Chancellor froze ‘indexation allowance’ for corporation tax. While this might appear to be a technical change, the Treasury expects to raise over half a billion pounds a year from the move once fully implemented.
Royal London’s analysis shows that those who have savings products such as endowments and ‘whole of life’ policies with insurance companies will be affected. Under current rules, when these investments grow, tax is paid only on the ‘real’ return, stripping out the effects of inflation. This tax is collected by the insurance companies and passed on to the government. But from January 2018 tax will be payable on the whole return, including anything which simply keeps pace with inflation.
Royal London says that this could affect up to three million of its own policy holders and many millions more across the whole insurance sector, in spite of Treasury documents saying it will have ‘no impact on individuals or households’. It is now calling for the policy to be reviewed and for implementation to be delayed while data is gathered on the full impact of this change on small savers.
Steve Webb, director of policy at Royal London, said: “This is a ‘stealth tax’ on millions of people who have made sacrifices and saved hard and are now penalised with extra tax. If the Treasury did know that this would be the impact of the tax then it should have been honest about the effect on savers. But if it did not realise that this would be the consequence then it should urgently review the policy.”
“Most of these policy holders are on modest incomes and would not pay tax on their investment growth if they invested directly because of the generous annual allowances for capital gains tax. There is no reason why they should now face additional taxes simply because they have invested through an insurance policy’.”
The Treasury responded by saying that insurance companies could choose to absorb the costs themselves, and that the current indexation system gave benefits to companies not available to individuals. The shift corrects this imbalance in the system.