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Should savers and investors pay more tax?

Emma Lunn
Written By:
Emma Lunn

A think tank has published a report calling for a change to the way wealth is taxed.

The Institute of Public Policy Research Commission on Economic Justice (IPPR) says it’s unfair that those who work for their income are taxed more highly than those whose income is derived from wealth.

The IPPR report titled  suggests that capital gains should be taxed at the same rates as income from employment, and the separate reliefs applied to capital gains tax (CGT) should be abolished.

This would see tax rates on gains from share price rises hiked from 18 per cent to 45 per cent for higher rate taxpayers, and could mean investors pay another £120bn in tax over five years.

The IPPR says that lower tax rates for the wealthy than for ordinary earners are fundamentally unfair; they also distort economic behaviour and create opportunities for tax avoidance.

Its second proposal is a fundamental reform of the income tax system, taxing all sources of income (earnings, dividends and savings) together and equally under a single tax schedule, with a gradually rising marginal tax rate as income rises.

The report says the current system of tax band “dates from the pre-computer age and is no longer fit for purpose”. The think tank says it is time to follow other countries such as Germany which already use a similar approach.

The IPPR argues that, among other advantages, this new system would be significantly more transparent, would eliminate the “tax cliffs” endemic in the current system, and would have the potential to raise significant revenue in a progressive manner.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The IPPR wants the government to ramp up the tax on savers and investors – both on the gains they make and any income they receive.

“It underlines how tax allowances and rates can change overnight, and the importance of wrapping as much of your savings and investments in ISA wrappers as possible – to help protect your money from tax, regardless of any policy change.

“The think tank says its proposals are fairer than the current system. It underplays the fact that in reality, the vast majority of savers and investors pay tax on their income from work, they save and invest diligently for their future, and may pay a second round of tax on their investment income or gains.

“At the moment, these are just think tank proposals, so there’s no guarantee anything will happen on the back of them. Investors don’t need to panic just yet.”