The Office of Tax Simplification (OTS) proposed the change within its review of savings income as a “more radical option” to help ease the process of tax self-assessment.
On examining the taxation of savings and dividend income, the OTS noted that the number of rates and allowances for personal savings and dividends is a significant cause of complexity.
“Cutting one or more of the reliefs would be one way to simplify matters, but it would be important to ensure that there are no unforeseen negative consequences,” it said.
A “more radical option” proposed by the OTS would be to end the differential tax rates for dividend income.
“If all taxable income was taxed at the same rates, it would not matter how the personal allowance was used,” it said.
“Making this change would have the effect of increasing the amount of tax due from those who receive amounts of dividend income above the allowance.
“It would also impact on the taxation of profit extracted as a salary or as a dividend, from family owned companies,” it added.
At present individual tax rates for dividends are:
- First £2,000 of dividends charged at nil %,
- In excess of £2,000 and within the basic rate band – 7.5%, the dividend ordinary rate,
- In excess of £2,000 and within the higher rate band – 32.5%, the dividend upper rate,
- In excess of £2,000 and within the additional rate band – 38.1%, the dividend additional rate.
Dividends are treated for the purposes of the income tax calculation as the highest part of the person’s income.
Lifetime ISA and pension confusion
The OTS also warned that there was particular confusion around the withdrawal of lump sum of pension funds since the introduction of the pension freedoms.
“The tax treatment of pension fund withdrawals is not well understood,” it said.
“The recently – introduced pension freedoms allow people over 55 or in poor health to make withdrawals from pension pots, and significant numbers of people have cashed small pension pots.
“However, there is evidence that people do not always understand the implications of their withdrawals,” it added.
And the OTS also proposed the simplification of ISAs, including a review of the rules on withdrawals from the Lifetime ISA.
First broad review
OTS tax director Paul Morton, said this was the first broad review of its type into the application of the tax system to savings and investment income.
“It seeks to identify ways to remove some of the real complexities in the system and help taxpayers understand their position,” he said.
“More than half of UK adults (65%) save some of their income. Most will have no tax to pay as the government provides many reliefs to encourage people to set aside money for future needs.
“These reliefs mean that savings taxation works well for most people, but there are significant complexities in some areas and an opportunity to improve the position further,” he added.