Deduction of Income Tax from savings income
Published 5 December 2016
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Who is likely to be affected
- certain types of collective investment schemes - open-ended investment companies (OEICs), authorised unit trusts (AUTs) and investment trust companies (ITCs) - which pay interest distributions
- individuals, partnerships and trusts investing in those schemes
- peer to peer lending platforms, individuals and non-corporate businesses investing in peer to peer loans and corporate businesses borrowing by way of peer to peer loans
General description of the measure
This measure ends the requirement for tax to be deducted from interest distributions made by certain investment schemes - OEICs, AUTs and ITCs - so that investors will receive the income without tax deducted.
Similarly, interest paid to investors in peer to peer lending will be paid without tax being deducted.
Policy objective
This measure supports the policy set out in the government’s Investment Management Strategy of simplifying and streamlining the taxation of investment funds. It brings the treatment of savings income from funds and peer to peer loans into line with interest paid on bank and building society accounts.
The vast majority of individuals now have no tax to pay on their savings income. This measure streamlines the tax system by ensuring that individuals with no tax to pay on interest from investments in funds or peer to peer lending will not need to reclaim tax deducted from HM Revenue and Customs (HMRC).
Background to the measure
Since the introduction of the Personal Savings Allowance with effect from 6 April 2016, 95% of taxpayers have no tax to pay on their savings income, including interest. Because of this, the obligation on banks and building societies to deduct tax at source from payments of interest on accounts was removed from the same date.
On 15 July 2015, HMRC published a consultation document ‘Deduction of income tax from savings income: implementation of the Personal Savings Allowance’, which explored the possibility of further changes to tax deduction rules. The consultation ran until 18 September 2015 and the government published its response on 9 December 2015.
In the light of the consultation, the government announced at the March 2016 Budget that, from 6 April 2017, deduction at source would end for interest distributions of OEICs, AUTs and ITCs and for interest on peer to peer lending.
Detailed proposal
Operative date
The measure will have effect for interest distributions and interest paid on or after 6 April 2017.
Current law
Current law requiring, with some exceptions, the deduction of income tax at the basic rate from yearly interest is included in Chapter 3 of Part 15 Income Tax Act 2007 (ITA), and in particular section 874. This includes yearly interest on peer to peer lending, unless one of the exceptions applies in a particular case.
Chapter 2 of Part 4 of the Income Tax (Trading and Other income) Act 2005 and Regulation 18 of the Authorised Investment Funds (Tax) Regulations 2006 (2006/SI/964) (the AIF Regulations) contain rules treating interest distributions of authorised investment funds (that is OEICs and AUTs) as yearly interest.
Regulation 96 of the AIF Regulations ensures that the same treatment applies to certain particular types of OEIC or AUT - Property Authorised Investment Funds and Tax Elected Funds.
Parts 2 and 3 of the Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations 2009 (2009/SI/2034) (the ITC Regulations) contain rules to apply the obligation to deduct tax to interest distributions of ITCs.
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to include new sections 888B, 888C and 888D of ITA. These will disapply the requirement in section 874 to deduct income tax in respect of amounts treated as yearly interest paid by, respectively, ITCs, OEICs and AUTs.
A new section 888E ITA will also be introduced in Finance Bill 2017, which will disapply the obligation to deduct income tax from payments of yearly interest on peer to peer lending.
The AIF and ITC Regulations will be updated to make consequential changes.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| - | -260 | -45 | -100 | -120 |
These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure will apply equally so that all individuals who invest in OEICs, AUTs, ITCs or peer to peer loans will receive interest without deduction of tax. Individuals with no tax to pay on savings income will no longer need to reclaim tax deducted from HMRC. Almost all those who do have tax to pay on this income already complete self-assessment tax returns and will continue to do so.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The measure is expected to provide the greatest benefit to taxpayers receiving significant amounts of savings income within their PSA. The changes will apply to all individuals investing in OEICs, AUTs, ITCs and peer to peer loans, and no disproportionate impact is anticipated in respect of groups with protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses.
The affected types of fund and peer to peer platforms and borrowers will no longer need to deduct tax from interest payments or account for tax deducted to HMRC.
While there are likely to be familiarisation and one-off costs for fund administrators and peer to peer platforms, including those associated with training staff and communicating the changes to customers, the ending of deduction is expected to lead to reductions in administrative burdens for businesses affected by this measure.
UK companies receiving interest income from OEICs, AUTs, ITCs and peer to peer loans will be unaffected by this measure as they already receive interest without deduction of tax.
Individuals who are self-employed or in partnership will receive this interest without tax deducted. All these individuals already complete self-assessment tax returns and will continue to do so.
Operational impact (£m) (HMRC or other)
HMRC is not expecting to incur any significant additional costs in implementing this measure.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review by HMRC through general compliance work as well as ongoing contact with representatives of the savings industry and customers.
Further advice
If you have any questions about this change, please email: mailbox.financialproductsandservices@hmrc.gsi.gov.uk.