avers who take advantage of the new personal savings allowance should be spared the task of filling in a tax return because they will receive their interest gross from this tax year. But the same cannot be said for investors who hold bond funds.
Although bond interest is treated in the same way as savings interest for tax purposes, and is eligible for the new allowance, fund firms are not yet ready to pay investors gross interest.
So while banks and building societies have started to pay interest gross, fund companies will continue to deduct tax from interest until April next year.
Experts said the delay was caused by the complexity of changing the interest system for non-banks, and said the matter of bonds and investments had been seen as an “afterthought” by policymakers.
This means that bondholders who qualify for the allowance will have to reclaim any tax paid on the interest they earn from HMRC.
The personal savings allowance, introduced earlier this month, allows basic-rate taxpayers to receive the first £1,000 in interest tax-free. Higher-rate taxpayers get a £500 allowance.
Danny Cox of Hargreaves Lansdown, the investment firm, said there was a perception that funds had been an “afterthought” in the implementation of the personal savings allowance.
- With a month to go, 90pc of savers don’t know what the personal savings allowance is
- ‘How will tax be applied if I exceed the new Personal Savings Allowance?’
“Because the tax deduction system is different, corporate bond funds were left out of the change that has just happened,” he said. “The focus was on cash interest in the banking system, but savings income also includes corporate bonds, which people might not realise.
“It is a much more complicated thing to change funds to a gross-paying basis compared with the same change in the banking system.” He added that there had also been “an assumption that most people will hold their bond funds in Isas”.
Funds such as unit trusts and the very similar open-ended investment companies (Oeics) will all continue to pay interest net until next April, so eligible taxpayers must claim back the tax deducted via a self-assessment tax return.
However, peer-to-peer lenders already pay interest gross after an interim decision made in January – so investors should treat income from peer-to-peer companies such as Zopa in the same way as bank or building society income.
HMRC carried out a consultation last summer to decide the best way to implement the allowance for bodies other than banks or building societies, which achieved no clear consensus.
A spokesman for HMRC said: “ Savings income goes beyond interest on [savings accounts], and some of these other forms of savings continue to be paid net.
“HMRC consulted on possible further changes to deduction-at-source rules for other types of savings income. The conclusion was that, from April 2017, tax will no longer be deducted from interest from Oeics, authorised unit trusts and peer-to-peer loans.”
Some investors hold bonds directly, with “retail bonds” being especially popular with private savers. Interest on retail bonds has always been paid gross, the London Stock Exchange said.
