tax on interest - please help

slopemaster

Please can one of you (ex-) tax inspectors or other knowledgable people explain to me the rules about interest on a fixed term savings account?
I have taken some out, but think I might have misunderstood about this.
I will ring the banks, but not sure the call centre people will properly understand about tax...

Presumably if interest is paid out monthly or annually into a separate, instant access account, it counts as income straight away.
So on a 3-yr term account there would be a difference between interest paid monthly (split over 4 tax years if taken out this time of year), interest paid annually (in 3 tax years) and interest not paid until maturity (all in one tax year). (Is this correct?)

But what if interest is crdited annually or monthly, but can only be taken out at the end of the term (say 3 years) does it count as income when it is credited, or when the account matures at the end and it actually becomes available?

Thanks if youi can help me understand the tax implications of this.
(I am a non-taxpayer, trying to stay one and use my allowances to best effect.)

CLAPTON

DIY_Accounting wrote: »

Taxable income is based upon an accruals basis which in laymens terms you account for income in the period it was accrued - occurred.

true for businesses but not for ordinary mortals

Mikeyorks

slopemaster wrote: »

But what if interest is crdited annually or monthly, but can only be taken out at the end of the term (say 3 years) does it count as income when it is credited, or when the account matures at the end and it actually becomes available?

Interest is taxable when it is paid ..... not when it accrues :-

http://www.hmrc.gov.uk/tdsi/key-info.htm#e

.... but your example where the interest is applied to the account, but cannot be withdrawn, doesn't appear to be specifically covered on the HMRC site. It's a mechanism fairly recently employed by deposit takers to prevent the situation where accumulated interest for several years becomes taxable in one year? So I would take the view that it's covered by :

Your interest is taxable in the tax year that it is paid to you, or credited to your account

.... the bit I've made bold. There is some exampled caselaw which suggests that's the right way to go e.g. an account is used as surety for a loan and therefore the accumulated interest is put on the account but is 'unavailable' to the original account holder. Nevertheless it was held the interest was taxable at the point of application to the account. I think the bold bit is your answer ..... and it appears to also suit the answer you were looking for?

It's probably also covered in the T&Cs of the term account you're exampling?

Velja

If you get interest certificate from your bank stating how much interest you have earned in the tax year then you need to declare it. Simple as that.

I think you might be confusing savings accounts with bonds that gains get paid out on maturity and you only need to pay tax once it matures.

Mikeyorks

Velja wrote: »

If you get interest certificate from your bank stating how much interest you have earned in the tax year then you need to declare it. Simple as that.

Not as simple as that. Frequently you don't automatically get an interest certificate for term deposits. Nevertheless you need to declare the interest .... if you need to do a Return.

Velja wrote: »

I think you might be confusing savings accounts with bonds that gains get paid out on maturity and you only need to pay tax once it matures.

The OP is quite clear that this is a 'fixed term savings account' and goes on to qualify the different types of interest permutations. These are not Bonds.

londoner08

I know basic rate tax is deducted at source, but what do you do if you go on to higher rate tax? I inherited a lump sum about 3 years ago, stuck it in savings, then shortly before I spent it, noticed from my P60 that I had gone into the higher rate tax band. I have rung the tax office a couple of times to try and discuss what I should do, but they can't give any guidance. The irony is, as I am a commission-only mortgage adviser, I am now about to drop back into the basic rate band!

How do you know at any given time whether you are a higher rate taxpayer or not? Should you contact each bank you hold a savings account to keep them advised? And how do you let the revenue know if you don't self-assess?

Excuse my ignorance - I lived overseas for a few years and am still getting used to the UK system again.

LittleVoice

londoner08 wrote: »

How do you know at any given time whether you are a higher rate taxpayer or not? Should you contact each bank you hold a savings account to keep them advised? And how do you let the revenue know if you don't self-assess?

You don't need to tell any of the banks anything. (Well you would if you had registered for gross interest and became liable to tax but that is not your case.) The banks simply deduct the standard 20%.

Whether you are a higher rate tax payer is only really ascertained once you have reached the higher rate threshold for the year - although it is assumed on a proportionate basis for PAYE throughout the year.

If it is the savings interest that is going to make the difference then you have to think of when the interest is paid. It is only when the interest is actually paid that it is part of your income for that year. For example if interest is paid on 10 April then though most of it will have been "earned" in the previous tax year, it is only counted for the year in which it is paid.

CLAPTON

londoner08 wrote: »

I know basic rate tax is deducted at source, but what do you do if you go on to higher rate tax? I inherited a lump sum about 3 years ago, stuck it in savings, then shortly before I spent it, noticed from my P60 that I had gone into the higher rate tax band. I have rung the tax office a couple of times to try and discuss what I should do, but they can't give any guidance. The irony is, as I am a commission-only mortgage adviser, I am now about to drop back into the basic rate band!

How do you know at any given time whether you are a higher rate taxpayer or not? Should you contact each bank you hold a savings account to keep them advised? And how do you let the revenue know if you don't self-assess?

Excuse my ignorance - I lived overseas for a few years and am still getting used to the UK system again.

if your P60 says you were into the 40% tax band and you have saving interst you need to tell the hMRC ..either phone or write with the full details.

slopemaster

Just wanted to say a (belated) thank you to those who responded to my questions.