Extending 10p rate to savings income will benefit 2.5m

More than 2.5m people will pay up to £150 less tax following the decision to extend the 10p tax band to savings income. The change was hailed by the government as a benefit for pensioners on low incomes who receive interest payments from building society or bank savings accounts on top of their pension.

According to inland revenue figures, 1.5m pensioners will be better off by an average £65 every year.

The tax cut, backdated to April, reduces the tax paid on the first £1,500 of savings income from the present 20% to 10%, and brings into line the starting tax rates on income from earnings and savings.

The effect is to cut tax for a 70-year-old pensioner with an income of £7,220 from £300 to £150 - equivalent to a 2% increase in take-home pay.

The government said the 10p rate would encourage savers to put away more money during their working lives, knowing the income they are able to draw out will be affected by a lower starting rate of tax.

"Whether an individual has income from earnings, a pension or savings they will enjoy the benefit of the 10p rate," a spokesman said.

The chancellor cut the starting rate of income tax to 10% in April, but failed to include income from savings. He was criticised by pensioners' groups claiming that they were being unfairly penalised.

The Low Incomes Tax Reform Group welcomed the tax cut, which it said removed an injustice that had been "staring pensioners in the face". The group mounted a campaign to persuade Mr Brown that his March budget had discriminated against pensioners who relied on savings income to live on, compared to others who relied on pension income.

Help the Aged also welcomed the cut but said it only put right an anomoly which should never have arisen. Mervyn Kohler, a spokesman for the charity, said: "The chancellor has now made the taxation of pensioner income a level playing field. But he has used a tax cut to benefit only a third of pensioners who have taxable savings income. Two-thirds of pensioners don't have any savings at all, and they will gain nothing."

Mr Kohler argued that only more affluent pensioners tended to pay tax on savings income. "So the chancellor has failed in his bid to target the poorest," he added.

He was also concerned that bank and building society interest on savings will continue to be taxed at source at the 20p standard rate.

This will force pensioners to reclaim a rebate for the difference between the 10% and 20% rate on the first £1,500 of taxable income.

Mr Kohler said this would involve pensioners having to fill in more complicated forms, and that in turn was likely to depress the number who apply for the rebate.