Budget Cheer For Bond Investors

BUDGET 2016: New tax-free allowance on savings and investment interest payments benefits fixed-income investors

Emma Simon 16 March, 2016 | 4:35PM
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Bond investors will receive a tax boost as a result of today’s Budget – allowing them to earn £1,000 interest a year, tax free.

The Chancellor George Osborne announced plans to “radically simplify” the taxation of fixed income funds. From April 2017, bond fund managers will stop automatically collecting 20% tax from their income payments to investors. 

This should bring the taxation of fixed income investment in line with cash deposits. The new savings allowance is being introduced for cash savers from April 6 2016. It means basic-rate taxpayers can earn up to £1,000 in interest in interest a year, tax free; for higher-rate taxpayers this will be reduced to £500. There is no tax-free savings allowance for additional rate taxpayers. Those receiving more will be obliged to declare this income on a tax return form.

From the following April these same rules are likely to apply to other interest-bearing investments such as corporate bonds, gilts, and peer-to-peer loans, whether these are held directly or through a fund structure.

In today's Budget, the Treasury declared: "Automatic deduction of savings income tax – the government will change the tax rules so that interest from OEICs, authorised unit trusts, investment trust companies and peer-to-peer loans may be paid without deduction of income tax from April 2017.”

Jorge Morley-Smith, director of business support & promotion at the Investment Association, said: "From April, basic-rate taxpayers will be exempt from tax on the first £1,000 of interest and receiving distributions without tax deducted means that 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."

CGT Bonus

These are not the only Budget changes to benefit UK investors. The Chancellor also announced a significant cut to Capital Gains Tax. The top rate of tax will be cut from 28% to 20%, with the basic-rate of tax halved from 20% to 10%. These changes will be effective from the start of the new tax year.

However, private landlords looking to sell a second property won’t be able to benefit, as gains made on property will continue to be tax at the current rates. Profits made on your principal residential property are exempt from CGT altogether.

Iain McCluskey of PriceWaterhouseCoopers added: “The cut in CGT for assets such as shares is a welcome move to encourage investment in areas other than buy to let, but it will be seen as a tax cut for the baby boomer generation in middle England.

“Very few taxpayers under 40 pay Capital Gains Tax - a reflection of the lack of assets plump with profits owned by younger taxpayers. In addition, last year over 50% of CGT paid by taxpayers in the UK was paid by taxpayers in London and the South East. Taxpayers living in Wales, for example, contributed only 2% of the total CGT paid by UK taxpayers.”

Tina Riches, a national tax partner at Smith & Williamson said: “The Chancellor’s plan to reduce CGT rates are a very welcome encouragement for entrepreneurs and others investing in businesses – but yet another disappointment for those invested in residential property who fail to benefit from this latest initiative.” This comes at a time when these same landlords have seen an increase in stamp duty, and will be able to claim less tax relief on mortgage interest.

Income Tax Cuts

The Chancellor did not go as far as announcing a cut in income tax. But once again he moved up the Personal Allowance - the rate at which people start paying tax on their earnings - and more significantly also increased the threshold at which people start to pay the higher 40% tax rate.

The personal allowance will increase to £11,500 from April 6 2017. From the same date he will increase the level at which you pay 40% tax from £42,385 to £45,000.

McCluskey said: “The rise in the upper limit for the 20p band will be welcome tax cut for many taxpayers. The rise in this band has been under-indexed for many years, dragging more and more taxpayers into the higher rate of tax. The Chancellor has made good progress in this budget as he drives towards a £50,000 limit by 2020.”

The Chancellor said this move will lift half a million people out of the higher-rate tax net. This he claimed was the biggest increase to this threshold since the 40p tax rate was first introduced by Nigel Lawson.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk