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Portillo: Conservatives to Abolish Taxes on Savings

Conservatives understand that savings give people choices and independence. People who are able to build up savings are better able to look after themselves and their families; they can be more independent of the state and face the future with more confidence.

"The Chancellor, as the election approaches, hints that he will cut taxes in the Budget. If he can, he should. But even so he would give back only a tiny part of what he has already taken in extra taxes. The amount we propose for tax reductions will be unaffected by the Chancellor's Budget. That is because we have announced how we will alter the Government's public spending plans so that two years after the election we can cut taxes by £8billion. That is scope for tax cutting above and beyond whatever can be afforded in the short term in the coming Budget.

"William and I want the next Conservative Government to encourage people to save. Today we set out the most radical changes to the taxation of savings in a generation.

"You may have read in the newspapers over the weekend that we want to stop pensioners paying tax on their savings. That is correct. But we want to go further than that. So today we are proposing to abolish tax on savings altogether, except at the higher rate. Let me repeat that.

"Under the next Conservative Government nobody will pay any tax on the interest they earn on their savings unless they have an income above £32,000.

"We will sweep away one of the great injustices of the tax system - that people have to pay tax on the income they earn, but then pay tax again when they put some of that income away and earn interest on it.

"Our proposal will also sweep away the complicated rules about how much people can put away tax-free and for how long. Under our plan they will be free to put as much money away as they want, take it out when they want and pay absolutely no tax on the interest they earn.

"A pensioner who pays income tax at the basic rate with £10,000 in an ordinary building society account will gain £120 in the first year of our scheme. If they keep the money and interest in the same account for five years, they will gain £740 compared to the current tax regime. For someone with £20,000, the gains would be £240 and £1481 respectively.

"The cost of this tax cut - which we will implement by 2003/04 - is approximately £2.3bn a year. We hope Gordon Brown will do something to reduce the tax on savings in his forthcoming Budget. But if he does not, we will fund this proposal in its entirety from the £8bn of public spending savings compared to Labour's plans that we have been outlining over the last few months.

"Limited resources mean that we have to target our tax cuts on those in most need and those who have been hurt most by Labour's stealth taxes. So our proposal will only apply to tax on savings at the starting and lower rates. The upper - 40 per cent - rate of tax on savings, for those earning more than £32,000 a year will remain unchanged.

"But, although we recognise the constraints, we want to go further still. We don't want to create a market distortion by encouraging people to save by putting their money in the bank or building society rather than investing it on the stock exchange.

"We need to encourage wider share-ownership, because it is economically advantageous and socially desirable to see people from all walks of life invest. We are also announcing today that the next Conservative Government will abolish income tax on dividends, except at the upper rate.

"At present dividends are paid from profits that have already paid Corporation Tax at 30 per cent. The recipient of the dividend pays income tax at a standard rate of 10 per cent but receives an income tax credit of 10 per cent. We will abolish the income tax payment, but the credit will still be paid.

"This measure will mean that basic and lower rate taxpayers no longer have an income tax liability on their dividend payments. The cost will be £680m a year paid for out of the £8bn of savings we have already identified and will, again, be implemented by 2003/04.

"We also propose that non-taxpayers, who under Gordon Brown are unable to reclaim their income tax credit, should be able to do so, at an extra cost of £30 million. This will help over 600,000 of the poorest members of society - often pensioners - who rely on small dividend payments to supplement their income.

"The next Conservative Government is determined to do more than right the wrongs of this Labour Government on savings.

"Our proposals to take savings out of tax offer a truly radical and far-sighted vision of the type of society we want to create. Younger people will be encouraged to save and take responsibility for themselves and for others. Older people will be able to look back on a life of saving and believe they did the right thing and were rewarded for doing the right thing.

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