When George Osborne announced the “personal savings allowance” in 2015, hardly anyone noticed.
Getting the first £1,000 of interest on your savings tax free didn’t matter much if you weren’t getting interest anyway, and with rates stuck close to zero that was the case for most people.
But these low payments also meant that the threshold was enough to take 95pc of taxpayers out of savings tax altogether.
This has changed dramatically. We learned this week that the number of Britons paying savings tax has doubled in just a year, and the Government now expects to take almost £7bn from people simply putting aside money for a rainy day.
This soaring tax on savings could well prove to be the next Tory fiscal disaster, triggering even more dissatisfaction than the widely despised inheritance tax – and if the Chancellor doesn’t take steps to fix it soon, the party will be in even more trouble than it already is.
The original allowance was the kind of fiddly measure that Osborne made a specialty of as chancellor.
His “savings revolution” sounded generous and was well-intended, but didn’t amount to very much at the time.
The idea was to encourage savings, but with interest rates at 300-year lows the returns simply weren’t there for people to want to save in the first place.
By the time rates reached 0.1pc in the pandemic, you’d have needed a million pounds just to earn £1,000 in the first place.
That’s if you got paid the full Bank Rate; given that most deposits pay rather less, you’d have probably needed a million or so more.
Unsurprisingly, most of us didn’t have that sort of cash sitting around, and if we did we were probably tempted to put it into other assets seeking capital gains.
This has started to change. The Bank of England’s base rate is already up to 5pc, and plenty of banks are offering higher returns if you are willing to park your money for a few months or more.
At these levels, even £20,000 will drag you into the net, with the result that lots more people are having to pay a chunk of tax on their savings income.
We already have some idea of the numbers. The stockbroker AJ Bell used a Freedom of Information request from HMRC to find out how much people were paying.
In the year to April 2023, the number of people paying tax on their savings incomes rose by 82pc to hit nearly 1.8m, paying up a total of £3.4bn for the Treasury’s coffers, compared to just £1.3bn a year before.
The bad news for savers doesn’t end there. Interest rates rose steeply last year and have kept rising since April.
People have a strong incentive to pile money into their savings accounts, and even if they keep the level constant can expect to earn a lot more on their savings this year – and pay a lot more in tax.
Some estimates suggest the Government will take £6.6bn this year, and possibly more. At these levels, the total take would be roughly equivalent to the £7.2bn raised annually through inheritance tax.
And while this might be good news for the bean counters at the Treasury, it’s not particularly good news for the Conservative party.
Even by our current dire standards, Conservatives should be rewarding saving, not punishing it. After all, in the 15 years since anyone last earned meaningful sums on their savings, the way we are taxed has changed significantly.
Creeping inflation has turned the 40pc rate into something increasingly normal for middle earners, with 7.8m people set to be paying it by 2027.
Being in this band cuts your savings allowance down even further to just £500, so if through heroic efforts you managed to save some money after paying all that tax, the Treasury would still be getting its greedy claws into just under half of the interest you earn.
This is the very opposite of what a genuinely Conservative government should be doing.
It punishes people for working hard, for managing their money carefully and responsibly looking after themselves and their families, and it does it in order to feed an out of control state that has long since lost the ability to manage its spending or deliver services that work.
It wouldn’t even be very hard to fix the problem if the Chancellor wanted to. The savings allowance could be increased to £10,000, so it only starts to bite when you had £200,000 or more set aside for a rainy day.
Or the tax on savings income could be fixed at 20pc, equal to capital gains tax, so that people with ordinary savings were taxed in the same way as entrepreneurs or private equity executives.
That way people might actually be rewarded for looking after themselves. As alien a concept as that might be to today’s Tories, that would seem like a sound conservative policy.
In the meantime, as millions of us have to fill in self assessment forms and send off cheques to HMRC to pay the tax on our savings, the stealth raid has the potential to turn into the next tax catastrophe to hit the party.
Inheritance tax is widely disliked precisely because it is seen as an unfair levy on aspiration and an additional charge on income that has already been taxed. That is even more true of the “savings tax”.
George Osborne was perfectly right to promise his “saving revolution”. The UK needs to save more, it needs to invest more, and it needs people to take responsibility for their own lives instead of always relying on the state.
That is impossible while the state is confiscating vast chunks of what people earn.
If Chancellor Jeremy Hunt does not reform the system very soon, the price will be a high one. People won’t bother to save. And they certainly won’t bother to vote for a party that has forgotten the core values it is meant to be defending.