Hundreds of thousands of investors in bonds run by life insurers could see the tax rate they pay drop from 40% to 30% under proposals lodged with the government last week.

The Association of British Insurers (ABI) has been lobbying the Treasury to change the tax on bonds to create a level playing field with other investments such as unit trusts. These will benefit from a lower-rate of capital-gains tax (CGT) from April.

At the moment, returns from bonds are treated as income so higher-rate taxpayers pay 40% and those in the basic rate are liable for 20%. In fact, the insurer pays 20% before returns are paid out, so basic-rate taxpayers have nothing more to pay.

With unit trusts, though, returns are treated as capital gains. Before December’s prebudget report, that meant higher-rate taxpayers paid 40% above their annual allowance, now £9,200, and those in the basic-rate band paid up to 20%.

However, taper relief cut the effective rate of tax down in stages to 24% for higher-rate payers and 12% for those in the basic band, if they had held the investment for 10 years or more.

Following the prebudget report, investors in unit trusts and direct shares will pay a flat rate of 18%, while those with bonds will continue to pay 20% or 40%.

Danny Cox of Hargreaves Lansdown, an adviser, said: “Unit trusts taxed under capital gains are generally better than insurance bonds already, but after the changes they will be at an even greater disadvantage.”

Experts said higher-rate payers, who could pay 40% on a bond but just 18% on a unit trust, would be hit hardest.

Adrian Boulding of insurer Legal & General has estimated that one in ten of its bond customers could be in this position – about 500,000 people if replicated across the industry.

About 750,000 new investment bonds were taken out in 2006, worth about £30 billion.

ABI director-general Stephen Haddrill said: “The government’s current proposals will lead to less choice for savers, and much less saving overall.”

Following weeks of negotiation with officials, the ABI has submitted a plan to the chancellor and is pressing for this to be adopted in the budget next month. It is calling for a reduction in the rate of tax paid on investment bonds to 30% for anyone who would currently pay 40%. It sees this as a sensible compromise between income tax at 40% and CGT at 18%.