Savers want tax relief now rather than later

The introduction of up-front tax relief as savings are built up is likely to be more attractive to most taxpayers than tax relief in the future when they cash in their funds.

But the cost to the State of tax reliefs on entry could be significantly higher than reliefs on exit.

For example, a top rate taxpayer who saved £5,000 (€6,349) over a year would cost the State £2,100, if relief was granted at the top rate. The cost for a standard rate taxpayer would be £1,100.

On savings accounts, taxpayers pay DIRT of 20 per cent on interest earned each year. On a £5,000 fund which increased to, for example, £7,000 over a five-year term, the current proposed exit tax of 25 per cent would yield the Government £500 - the tax will be charged on the growth in the fund over the term. Giving full tax relief on exit would only cost the Government £500, considerably less than up-front relief. Savers who invest in unit funds pay annual tax on any notional gains but there is no tax bill when the fund is encashed. From January 1st, there will be no annual tax on these funds but a proposed exit tax, levied at the standard rate, currently 22 per cent, plus 3 per cent. Any new measures on savings will have to be structured to stimulate an increase in savings rather than deflect funds from current savings or pensions plans to tax-based schemes. Mr McCreevy will also have to ensure his measures will not lead to a cash bubble flowing back into the economy in the future.