Interest rates cut should trigger Personal Savings Allowance reform


The Bank of England's decision to cut interest rates to 0.25% raises further questions for the Government to continue with the Personal Savings Allowance, and serious consideration should be given to abolishing this complex and unnecessary allowance.

The Personal Savings Allowance, which has only been in place for a few months,  allows exemption from tax for the first £1,000 of interest for a basic rate tax payer and £500 for a higher rate taxpayer.  Additional rate taxpayers (those with income over £150,000) are not eligible for the allowance.
Applying the Bank of England's new base rate, a basic rate taxpayer would need £400,000 of savings to fully utilise the £1,000 Personal Savings Allowance.  A higher rate taxpayer would need £200,000 of savings.
Nimesh Shah, partner at Blick Rothenberg, said: "I expect it is highly unlikely that someone with £400,000 of savings will be a basic rate taxpayer!  In addition, those individuals with sizeable savings are likely to have taken advantage of their ISA allowances over the years, therefore a person would need such savings outside of their tax-free ISAs to benefit from the Personal Savings Allowance.
"Over the last 5 years, the Government has tinkered with allowances and rates and there are a number of unnecessary provisions which should be abolished to simplify the personal tax system.  The Personal Savings Allowance is one of several measures that the Government, together with HM Revenue & Customs and the Office of Tax Simplification should look at scrapping."
In abolishing the Personal Savings Allowance, the Government could replace it with an additional 'top-up' to a person who contributes a certain amount to an ISA. 

Nimesh explained: "The Lifetime ISA, which was announced at George Osbourne's very last Budget, is offering just that whereby an eligible individual contributing up to £4,000 each year will receive a bonus of £1,000. 
"The Government would be wise to consider increasing the £1,000 incentive through abolishing the Personal Savings Allowance, or introducing a new category of ISA incentive which would benefit the whole population."
He added: "The effect of widening the ISA regime would simplify an already over-crowded personal tax system with a Government backed incentive for savers, in what looks to be a longstanding period of low savings rates."