I should have known better.
When Mr Darling, in his Budget, announced the introduction of a 10% tax rate on the first £2,320 of savings income, I started to rub my hands. OK the Chancellor was, illogically, ending the 10% starting rate of tax for income in general and this was just a sop to Cerberus but something we could exploit for our clients.
I therefore penned a paper on how our clients could create a director’s loan account balance of £23,000 and then charge interest to the company at 10%. For a husband and wife company this could be nearly £500 per annum of tax saved.
Unfortunately, I failed to heed a favourite dictum of mine, “the devil is in the detail”.
The watchful guardians in our tax department, Chris and Gill, intervened. “It is not quite as you may think. The reality is that your earnings are taken into account in priority to your savings income in establishing whether you qualify for the 10% tax rate on savings income”.
If your earnings are at least £7,755, these will be set against your personal allowance (£5,435) with the balance (£2,320) set against the 10% savings band of £2,320. As the balance of earnings has used up the £2,320 band savings income will be taxed at 20%.
Let us take another example. You have a salary of £20,000 per annum and you have savings income of £2,000. I imagine your first thought might be that your savings income will be taxed at 10% as it is below £2,320. No. Your salary soaks up your 10% band and you will be taxed at 20% on your investment income.
The 10% savings rate will be helpful to some people, possibly those who are at home and do not work or those whose wages are below £7,775 per annum. Given that one’s personal allowance will be set against taxable income first and that tax credits on dividends are not recoverable in any event, it looks like the measure is not going to cost too much in tax. I wonder how many people have no earned income but savings income between £5,500 and £8,000, given how much capital one might need to generate that level of savings income, I would warrant not an awful lot.
It seems to me that this 10% savings rate measure was just there as a headline to take some of the publicity away from the removal of the 10% lower rate band.