Millions of pension savers are set to fall victim to the freezing of indexation allowance for corporation tax, as announced in the Autumn Budget, Royal London has highlighted.

While the technical change regarding the indexation allowance of corporation tax is expected to raise over half a billion a year once fully implemented, Royal London has found that those who have savings products including endowments and 'whole of life' policies with insurance companies will suffer from the tax increase.

The current rules stipulate that as investments grow, tax is paid only on the 'real' return, stripping out the effects of inflation; this is then collected by insurance companies and given to the government. However, under the new policy, from January 2018 tax will be payable on the whole return, including anything that keeps pace with inflation, Royal London explained.

This policy change could affect up to three million of its own policy holders and millions of others across the insurance sector, Royal London has predicted.

The insurer further highlighted that the Treasury, in official documents following the Budget, has wrongly claimed that the policy change has "no impact on individuals or households". As a result of its findings, Royal London is calling for a review of this policy and for implementation to be delayed so that the full impact on savers can be realised.

Royal London director of policy Steve Webb explained: "This is a 'stealth tax' on millions of people who have made sacrifices and saved hard and are now penalised with extra tax. If the Treasury did know that this would be the impact of the tax then it should have been honest about the effect on savers. But if it did not realise that this would be the consequence then it should urgently review the policy.

"Most of these policy holders are on modest incomes and would not pay tax on their investment growth if they invested directly because of the generous annual allowances for capital gains tax. There is no reason why they should now face additional taxes simply because they have invested through an insurance policy."

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