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Early Withdrawals - just a warning when comparing rates
D1zzy
Posts: 1,500 Forumite
As I understand it that the penalty figure for Early withdrawal (say 90 days loss of interest) - is just that a penalty equivalent to 90 days GROSS interest.
You are still liable for tax on the full amount of any interest you received.
If you have not accrued enough interest to cover the penalty, it will be deducted from your capital.
Simple numbers:-
Invest £1000
90 days gross interest is £100
Balance £1100
Withdraw after 90 days - penalty £100
Balance £1000
Tax on £100 interest = £20
After penalty and tax Net Balance = £980
Withdrawal after 30 days -penalty still £100 (interest accrued £33)
Balance £1033
Penalty (90 days interest) £100
Balance 933
Tax due on £33 interest =£6.60
After penalty and Tax Net Balance = £926.40
This was highlighted for us when we were considering early withdrawal of a large sum from Norther Rock as it headed for death - and discovered that we would lose significantly more than we had anticipated - enough to make us hang in there to the end.
You are still liable for tax on the full amount of any interest you received.
If you have not accrued enough interest to cover the penalty, it will be deducted from your capital.
Simple numbers:-
Invest £1000
90 days gross interest is £100
Balance £1100
Withdraw after 90 days - penalty £100
Balance £1000
Tax on £100 interest = £20
After penalty and tax Net Balance = £980
Withdrawal after 30 days -penalty still £100 (interest accrued £33)
Balance £1033
Penalty (90 days interest) £100
Balance 933
Tax due on £33 interest =£6.60
After penalty and Tax Net Balance = £926.40
This was highlighted for us when we were considering early withdrawal of a large sum from Norther Rock as it headed for death - and discovered that we would lose significantly more than we had anticipated - enough to make us hang in there to the end.
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Comments
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If you have other savings accounts is it not possible to offset the 'negative' income represented by the interest penalty anyway - and so 'recover' the tax
e.g
Account 'A' earns 'net interest' of -£100, tax paid £20
Account 'B' earns £50, tax £10
Account 'C' earns £150, tax £30
A+B+C = £100, but tax = £40 i.e. £20 too much - a tax refund (R40) becomes due........under construction.... COVID is a [discontinued] scam0 -
my understanding is that tax wise its not considered negative income but a penalty. It might be deductable from capital gains, but even that I don't think so0
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If you have other savings accounts is it not possible to offset the 'negative' income represented by the interest penalty anyway - and so 'recover' the tax
e.g
Account 'A' earns 'net interest' of -£100, tax paid £20
Account 'B' earns £50, tax £10
Account 'C' earns £150, tax £30
A+B+C = £100, but tax = £40 i.e. £20 too much - a tax refund (R40) becomes due...
No - 'cos its effectively a "fine" for early withdrawal that has nothing to do with the interest that you actually received - so account A still received + £100 in interest0 -
(Hmmm.) But different banks will apply different interest penalty terms (not always a fixed rate account, for example - so the interest can be different depending on whether it's calculated 'forward' or 'backwards' from withdrawal) However I got a 'penalty' on which I claimed to have received only the 'net' postive amount paid. The fact that Abbey (in my case) didn't 'reduce' the interest payable (i.e. from '£550' to '£413') and then tax this amount at 20% but, instead reported the income at '£550', paid tax on that and then deducted £137 from that was surely something entirely up to them no? Other interest penalities I've received have simply reduced the gross interest in the first place. So clearly there can't be any one single approach required by Hector?No - 'cos its effectively a "fine" for early withdrawal that has nothing to do with the interest that you actually received - so account A still received + £100 in interest.....under construction.... COVID is a [discontinued] scam0 -
I've only looked at my fixed term jobbies and for all of them the penalty is an amount equivalent to interest (not actual intetrest) so what will appear on the tax certificate is the interest that was due to the date you withdrew - but as always it'll depend on the Ts & Cs.(Hmmm.) But different banks will apply different interest penalty terms (not always a fixed rate account, for example - so the interest can be different depending on whether it's calculated 'forward' or 'backwards' from withdrawal) However I got a 'penalty' on which I claimed to have received only the 'net' postive amount paid. The fact that Abbey (in my case) didn't 'reduce' the interest payable (i.e. from '£550' to '£413') and then tax this amount at 20% but, instead reported the income at '£550', paid tax on that and then deducted £137 from that was surely something entirely up to them no? Other interest penalities I've received have simply reduced the gross interest in the first place. So clearly there can't be any one single approach required by Hector?0
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