One way or another "Talk of tax cuts for savers" is shortsighted gesture politics

Has the Chancellor fallen into a clever trap set by the Tories or are both Labour and the Tories confused? Or, is it business as usual. They know exactly what they're doing and talk of cutting tax on savings income is intended as a vote grabbing ploy despite the consequences that would ensue?

At the start of January David Cameron said that income tax on savings for basic rate taxpayers should be abolished. Top rate taxpayers would continue to pay "the same" [as they do now]. This mirrors a promise made by William Hague nearly ten years ago. Then Labour ignored it. But yesterday, giving evidence before the House of Lords Economic Affairs Committee, The Chancellor implied that he may make such an announcement in his forthcoming Budget.

I don't get it. Everyone already has the opportunity to invest in tax free savings accounts. The annual limit for investment in ISAs is £7,200 Even to invest just the maximum cash element of £3,600 each year out of surplus income is tough for most people who are subject to only basic rate income tax.

Beyond that, assume someone has £10,000 of savings invested (other than in an ISA). Assume that they are currently able to receive a 3% return (which is high in the current market). The interest they would earn on this in a year would be £300. The basic rate tax retained by the bank would be 20% of this ie: £60. So if this were abolished the tax saving would be equivalent to £1.15 a week - on savings of £10,000. For most people the saving would be even lower as their taxable savings are significantly lower than this.

And what about higher rate taxpayers? That's anyone whose total income is over about £41,000. In theory there would be no change for them. In practice the impact would be enormous.

If the banks no longer have to deduct and withhold 20% tax at source it means they will be paying out interest gross. This puts more money in everyone's pockets - not just the basic rate taxpayers. But higher rate taxpayers would then have to pay twice as much tax on their interest. This could be dealt with through their PAYE codes if they are employees. But everyone else will simply have to pay the extra tax on 31 January after the end of the tax year. ie: long after the additional interest was received, spent and forgotten.

Using the same example of £10,000 savings (outside of an ISA), a 3% return would generate £300 of interest over the year. At present a higher rate taxpayer would receive only £240 (after the deduction of 20% tax) and would have to pay a further £60 of higher rate tax. In future they would receive the full £300 and have to pay £120 of tax.

Hence my view that one way or another " Talk of tax cuts for savers" is shortsighted gesture politics. Do you agree or have a contrary view? Please add your comments to this blog post.