Millions of savers with endowment and whole of life policies are to be taxed in a move that will raise over £500m for the Treasury, an analysis of the Budget small print has revealed.
Budget documents show that the Chancellor is freezing the ‘indexation allowance’ for corporation tax, an apparently technical change that will raise the Treasury over half a billion pounds a year once fully implemented.
People with savings products such as endowments and ‘whole of life’ policies with insurance companies will be hit by the change says Royal London. 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 estimates that this could affect up to three million of its own policy holders and many millions more across the whole insurance sector.
Royal London has slammed the Treasury for claiming that the policy has ‘no impact on individuals or households’. The firm is now calling for the policy to be reviewed and for implementation to be delayed whilst data is gathered on the full impact of this change on small savers.
Royal London director of policy Steve Webb says: “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.”