A new tax to pay on your investments
From next week investors will have to start paying more tax.
Investors will soon have a new tax to worry about. The so-called “Discount Tax” will apply to any rebate payments they receive.
It will mainly affect fund supermarkets and will apply to payments made to investors in a Collective Investment Scheme, insurance policy or other investment product which are paid by fund managers, fund platforms, advisers, or any other person acting as an intermediary between the fund and the investor.
There is no minimum or maximum amount which needs to be invested before the tax sets in. Critics have called it an anti-competitive “second tax on income”.
But investments within an ISA or a SIPP (self-invested personal pension) will be protected from the extra tax.
HMRC confirmed the changes yesterday and the new tax will come into force on the 6th April, giving fund supermarkets only a week to prepare for the change.
The Discount Tax
If investors are paid rebates on their investments, either through cash or additional fund units after the new tax year begins, these will contribute towards their taxable income, HMRC has said.
This has not happened before, but HMRC will only begin taxing people from 6th April and won’t be collecting payments retrospectively.
Under the new rules these payments will be taxed at basic rate and taken from any rebates paid. Higher-rate taxpayers will need to declare this income through a self-assessment tax return.
Loyalty bonuses
Rebates, or loyalty bonuses as they’re also known, cut costs for investors and they are used by fund supermarkets to make the cost of investment cheaper.
Investors are paid the rebate by the fund supermarket they’ve used. This comes from the money investment companies, which operate the funds which you can invest in through the fund supermarkets, pay in advice commission.
The money is then passed onto the investor in the form of the rebate, but the amount varies between different companies. You can read more about the cheapest places to invest in our article The cheapest investment platforms - rivals to Hargreaves Lansdown.
These payments are also known as trail commission. The Financial Services Authority (FSA) is currently in talks, looking at whether to ban these payments.
As investors and fund supermarkets only have a week before this tax will start to apply, HMRC has said it’ll accept an estimated figure of the tax owed for 2013.
Anti-competitive tax
Hargreaves Lansdown, one of the largest fund supermarkets in the UK, has said the tax is extremely disappointing news for all concerned and is anti-competitive.
Although the amounts at stake are relatively small and come to around £10 per year for the average investor, it argues that investors need discounts as these are key to a competitive economy.
It also warns that HMRC could move onto taxing cashback schemes in the UK, which could prove a massive blow to websites such as Top Cashback and Quidco.
More on tax
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We must be the only country in the world that can think of a way to tax a discount. ie something we've not spent money on. Next we'll have to pay tax on the reduced part of a sale price in shops...
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naterbox: i guess that the tax percentage from your interest percentage from your savings will be far smaller than you would loose by inflation when not saving in bank and getting some interest (however small) and then paying the tax. but, in principal, you are right. lets all of us take our money from banks and lets see what will happen :) few days ago, when i closed my previous ISA and a lump of money appeared in my current account, i received a phone call from a private number. it was my bank in which i have the current account. i know they tried to call me before. and since then i also received a letter that they could not reach me the first time explaining very politely that they are there waiting for me, for my action, if i needed to ask something, just call or pop in to the branch because of the money... the second phone call was about the money, that they see i have received some from a different company and whether i would like to put them in one of their saving accounts before i spend them all (she really said something of this meaning). i intended to open a new isa in coventry, as they do not accept transfers and i only have a yearly allowance available. i am open to any safe bank for an account with a reasonable interest. so i asked her what is the interest. she twittered some 1.3% or something like that. "that is poor, i am searching elsewhere for a better deal" i told her. no way i am going to waste the potential of the money for THAT.
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Aren't we supposed to save? I've paid tax on my money when it was paid as salary, I'm paying tax on some of my investments, though I'm transferring as much as I can into ISAs each year. Am I supposed to keep my cash under the bed in future?
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28 March 2013