Barclays Boss Urges 'Tax Stimulus' For Savers

by Robert Lee, Tax-News.com, London

19 January 2009

With UK interest rates plummeting, John Varley, the Chief Executive of Barclays Bank, has urged the government to recognise the plight of savers and introduce tax breaks that will make it worthwhile to keep money in the bank.

Varley told Channel Four News that the government needs to create a "tax stimulus" for saving because "the ability of banks to create the sort of savings returns that customers had two or three years ago is quite constrained."

Varley said that while the government's efforts to lift the UK economy have so far have been concentrated on encouraging more lending, savers outnumber borrowers in the UK by "a significant margin."

Last week, the Bank of England lowered interest rates to a historic low of 1.5%. But with more cuts likely in the months ahead, there is a real possibility that more depositors could soon see a 0% - or even negative - rate of interest on their savings. Indeed, many UK banks and building societies have already lowered their interest rates on deposits to zero.

And if the prospect of paying the bank to keep your money wasn't unpalatable enough, tax experts have said that, under current tax rules, individuals affected will not get a tax deduction for this negative interest. "There's an element of tails you lose and heads you lose too," says Leonie Kerswill, tax partner, PricewaterhouseCoopers LLP.

It is anticipated that, as the economic gloom deepens, Chancellor of the Exchequer Alistair Darling will announce further tax relief measures in the 2009 budget, which is due to be delivered in the coming weeks. Whether there will be tax relief for savers is at this time unknown. However, there is a possibility that, in the now time-honoured fashion, the Labour government could steal a few ideas from the opposition Conservatives, who have proposed several measures to encourage higher rates of saving.

Under the Tory plan, announced by party leader David Cameron earlier in the month, everybody who pays the basic 20% rate of income tax would pay no tax on interest earned from bank deposits. The plan also seeks to help pensioners surviving on their savings by raising the tax allowance for the over-65s. According to the Tories, these proposals, which would cost GBP14bn, would leave anyone with savings and who has earnings or pension income of less than GBP43,875 better off. However, critics have derided Cameron's plan as small beer given the potential economic tsunami that recent forecasts suggest is coming our way this year.

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