Amongst the various tax changes that have come into play this year, a number have had a big impact on those with investments and this is to continue into next year as the scope of the changes expands.

In the past, banks and building societies have deducted and paid to HMRC basic rate tax on any interest for a taxpayer (yes, we remember the days when banks used to pay interest on their accounts) and investment funds which invested primarily in fixed interest investments such as Gilts and corporate bonds did the same. So long as at least 60% of the investment is in cash or fixed interest investments, the income paid is treated as interest.

When HMRC changed the system this year so that interest, if you were lucky enough to get any, would be paid without any tax deduction, it almost appeared as if they had forgotten interest paying investment funds. These funds were not included initially in the change to gross payment however, in August 2016, it was confirmed that this would be the case as from 6^th April 2017.

This change has the potential to have a far bigger impact in terms of tax return requirements than the change to bank accounts. Where on bank accounts one may be struggling to get more than 1.25% on any sizeable amount of cash, fixed interest funds investing in high quality corporate bonds will be delivering between 3% and 4.5% income still, with those mining the sub-investment grade bond strata paying significantly more.

Since the dividend allowance of £5,000 is there for all, whilst the Starting Rate for savings is only there if other income is less than £16,000, our view continues to be that it makes sense to place the highest yielding fixed interest funds into your ISA and pension wrappers first to shelter as much of that income from tax as possible. Where the “sweet spot” of allocation now falls is going to be more varied however, with higher yielding dividend funds possibly moving up the priority ladder where the dividend allowance is being used in full also, but very dependent on the overall position of each individual and the tax rates otherwise payable.

The Financial Conduct Authority does not regulate tax advice