Tories pledge to scrap savings tax for low paid

By Frank Prenesti and Keith Weir

LONDON (Reuters) - The Conservative Party on Monday called for the abolition of savings tax for low earners to help them weather the economic downturn.

Conservative leader David Cameron said the 4.1 billion pound pledge could be funded by a cut in public spending across some government departments in the 2009-10 financial year.

He refused to be drawn on whether he would leave the measure in place in future years -- when public spending increases are slated to be tighter -- saying he wanted to see what budgetary measures the government might introduce before responding.

The Conservatives enjoyed a more than 20 point lead over Prime Minister Gordon Brown's ruling Labour Party last year, but Brown's handling of the economic crisis has helped him to cut the deficit and left Cameron trying to regain momentum.

An election must be called by mid 2010 at the latest.

As loan rates tumble, many people find parallel falls in deposit rates are eroding supplementary incomes from savings, with some banks offering as little as 0.1 percent.

The Bank of England has cut interest rates sharply in the face of the economic downturn and markets expect a further cut on Thursday to 1.25 percent from 2 percent.

Cameron wants the government to abolish the 20 percent tax on savings accounts paid by people on the basic rate of taxation. Higher earners would continue to pay up to 40 percent on their savings income.