Bond fund investors will no longer be hit with a 20 per cent tax bill on the interest paid from investment companies when new tax rules kick-start next year.
HM Treasury announced in the Budget on 16 March that the tax rules would change from April 2017 so that interest from open-ended investment companies, authorised unit trusts, investment trust companies and peer-to-peer loans were paid without the deduction of income tax.
Under the current system, bond fund managers automatically collect 20 per cent tax from their income payments to investors.
The move means bond fund investors can take advantage of the personal savings allowance, which is set to kick in next month.
Announced in last year’s Budget, the new allowance means basic-rate taxpayers can earn up to £1,000 interest a year on their savings or income without paying tax on it.
Higher-rate taxpayers will be able to earn £500 interest without being taxed.
According to Jorge Morley-Smith, director of business support at the Investment Association, the measure aims to “radically simplify” the existing regime.
He said: “Receiving distributions without tax deducted means you will not need to file tax returns simply to claim tax back.
“It also ensures that UK funds continue to be an attractive and competitive savings vehicle for UK and overseas savers.”
Annabel Brodie-Smith, communications director at the Association of Investment Companies, said this was also positive news for investment trusts.
She said investors in investment companies would benefit as they will be able to full make use of their personal savings allowance of up to £1,000.
However, Ms Brodie-Smith pointed out that interest over this amount would need to be declared on the tax return.
Danny Cox, chartered financial planner at Bristol-based Hargreaves Lansdown, said: “This makes absolute sense given the introduction of the personal savings allowance and the abolition of tax deducted at source from cash accounts, and aligns the treatment and method of how all savings income is paid.
“This will also save Isa and Sipp managers having to reclaim the tax paid on the interest, which will make matters simpler.”