Page last updated at 17:17 GMT, Monday, 5 January 2009

Q&A: Tory savings policy

The Conservatives have announced a series of proposed tax changes they say will encourage people to save more and help pensioners in the current economic climate.

Why do savers need help?

The Conservatives want to use the tax system to better reward savers, who they say are the "innocent victims" of the looming recession. Interest rates have fallen to a 57-year low of 2% as policymakers try to bolster the rapidly slowing economy and, as a result, the interest which people get on their savings has dwindled. The Tories say it is unfair people are taxed twice - firstly on their income and then on interest from savings.

What are the Tories proposing?

The Tories want to boost the value of people's savings and encourage more people to save. To do this, they want to scrap the tax which most people pay on interest accrued from savings. Basic rate taxpayers - those with earnings of less than 43,000 - who currently pay tax at 20% would be exempt from tax. Higher earners, those who pay income tax at 40%, would be unaffected by the proposed changes.

How much will people gain?

The Tories say some savers could theoretically be 7,200 a year better off although hardly anyone stands to benefit in this way. More realistically, they say a retired 60-year old with an annual pension of 12,000 will pay 200 less in tax a year. A part-time worker who earns 10,000 a year would be 160 better off.

What about pensioners?

To help pensioners, the Tories would raise the limit for tax-free allowances - the level of income on which no tax is paid - by 2,000 for everyone over 65. This would raise the threshold to 11,490 for 65-74 year olds and to 11,640 for those over 75. Those with pension income and other earnings between 9,490 and 32,930 will benefit up to a maximum of 400 a year, they say.

How will these changes be paid for?

The proposals, expected to cost about 4bn, will be paid for by limiting increases in public spending due next year. Labour plans to boost spending by 30bn in 2009-10 and the Tories would trim about 5bn off that figure. This is equivalent to the efficiency savings Labour has earmarked for 2010-11 and the Tories would bring forward this process. They have pledged to match existing spending on health, schools, defence and overseas aid while cutting the rate of spending growth in other areas from 4% to 1%.

What do the other parties say?

They are critical. Labour say most pensioners won't benefit as they currently pay no tax. As for savings, ministers say those on incomes of less than 30,000 a year may only be 5 a year better off, of less value to people than the money saved by the recent VAT cut. They also point out that people can already shield 3,600 in savings from tax a year by investing in cash ISAs. The Lib Dems say the financial benefits would be paltry and have called for substantial cuts in income tax for those on low and middle incomes.

What do experts think?

According to accountants PriceWaterhouseCoopers, someone with 16,000 in a bank or building society - the average level of savings - getting 2% interest right now would save 64 a year. However, should interest rates return to 5%, they would then save 160. They have also calculated that a qualifying pensioner with a pension worth 17,500 a year could potentially gain 400 a year. But the Institute of Fiscal Studies has warned the plan could take more money out circulation at a time when the economy is most in need of it.

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