Millions of savers will be hit by a ‘stealth tax’ affecting savers with whole of life policies, Budget analysis by Royal London has found.
Announced in this week’s Budget, the Treasury said it will freeze indexation allowance on corporation tax which will raise £525 million for the government by 2023.
The policy was designed to align the treatment of capital gains by companies with those of individuals, the Treasury said.
Royal London has found this freeze on indexation will hit those with endowments and whole of life policies. At the moment tax is only payable on returns which go above the inflation rate on these products, but the new change will mean tax is payable on the whole of the return.
Around 3 million of Royal London’s policy holders will be affected by the change, the mutual assurer estimated, with millions more set to be hit.
Royal London policy director Steve Webb said: ‘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.’