The Office of Tax Simplification says we should scrap the 10% tax rate on some savings - which in practice tends to apply mainly to pensioners. This group is already reeling from the impact of the Granny Tax last year, and now faces losing another £90 a year to yet more tax tinkering.
So why hit this group with another tax blow?
The 10% rateMichael Jack, Chairman of the Office of Tax Simplification, said that the current system of taxation on older people is just too complex. He said: "A combination of multiple sources of income, ranging from pensions to interest on savings and investment dividends may well be high enough to incur a liability to pay tax. But the answer to the "how much should I pay" question may involve everything from the source of the income, their age, marital status or even their ability to see."
The 10% tax on some savings is pretty complicated. According to Taxaid, for those under the age of 65 it applies if the total of all your 'non-savings income' comes to less than £10,815. This means it tends to apply only to those who do not earn, or work very little.
For those aged 65-74 it may apply to those with pensions income under £13,210, and for those over the age of 65 the limit is £13,370.
The 10% rate of tax applies to the first £2,710 of income on savings for those who qualify.
The recommendationThe logic that the OTS is applying is that it's a hangover from the 10p rate of tax, left lying about when that rate was scrapped in 2007. As a result it is very niche, and too complicated for people to understand.
Jack said: "We recommend that the 10 per cent savings rate is removed, as awareness and claim levels are so low that it is ineffective in incentivising savings." It said that this will hit around 525,000 people - most of whom are pensioners. It will cost them around £90 each a year.
The OTS recommends that in return for scrapping this tax, the ISA limits should be increased for everyone - so pensioners could move more money into ISAs to save tax.
- What are the ten pension mistakes millions of Britons make?
- Top 10 retirement tips - special 16-page guide
Other suggestionsThe review also suggested simplification of the blind person's allowance and married couple's allowance
The Low Incomes Tax Reform Group responded to the recommendations positively - although it added: "with the proviso that any savings are reinvested to benefit older and disabled taxpayers who most need the help those systems are currently intended, but largely fail, to provide."
The OTS also recommended that pensioners should receive a form every year stating the amount of taxable income they earned and the tax paid on it. It said: "This would give pensioners an accurate figure for their taxable state income and enable them to check they are paying the right amount of tax."
LITRG's Chairman, Anthony Thomas, commented:"This should greatly improve people's understanding of how their pensions are taxed - something which has bewildered many for years."
The Treasury is currently reviewing the suggestions.