NS&I Bond Interest Penalty

DavidAC

Their bonds have an early withdrawal interest penalty as below.

Except where paragraph 25 applies, a penalty equivalent to 90 days interest on the sum requested, at the rate your Bond is earning on the day before the day you cash in, will be deducted from the amount to be cashed in. This penalty also applies to Bonds held for less than 90 days.

Is this penalty deducted the gross equivalent, net of 20% tax, or net of higher rate tax for a higher rate tax payer?

It would be helpful if someone who has cashed in easly could state the gross interest of their bond, the amount withdrawn and amount deducted.

intalex

I think it'll be based on the gross rate, as I would think that the tax component is only applicable to income (interest) and not on expense (penalty).

Hence, the best way to work out the value of the penalty would be to multiply "Gross Interest Rate x 90/365" by the value being withdrawn.

D1zzy

DavidAC wrote: »

Their bonds have an early withdrawal interest penalty as below.

Except where paragraph 25 applies, a penalty equivalent to 90 days interest on the sum requested, at the rate your Bond is earning on the day before the day you cash in, will be deducted from the amount to be cashed in. This penalty also applies to Bonds held for less than 90 days.

Is this penalty deducted the gross equivalent, net of 20% tax, or net of higher rate tax for a higher rate tax payer?

It would be helpful if someone who has cashed in easly could state the gross interest of their bond, the amount withdrawn and amount deducted.

Its a Penalty not actual interest, so the full amount of interest is payable upto the withdrawal date and tax is due on the full amount. eg

If 90 days interest = £100
basic rate tax = £20
Net is £80
Penalty due = £100
So your return is £ -20

D1zzy

DavidAC wrote: »

Their bonds have an early withdrawal interest penalty as below.

Except where paragraph 25 applies, a penalty equivalent to 90 days interest on the sum requested, at the rate your Bond is earning on the day before the day you cash in, will be deducted from the amount to be cashed in. This penalty also applies to Bonds held for less than 90 days.

Is this penalty deducted the gross equivalent, net of 20% tax, or net of higher rate tax for a higher rate tax payer?

It would be helpful if someone who has cashed in easly could state the gross interest of their bond, the amount withdrawn and amount deducted.

Its a Penalty not actual interest, so the full amount of interest is payable upto the withdrawal date and tax is due on the full amount. eg
Suppose you have accrued £200 in interest
and 90 days interest = £100

Gross interest = £200
Basic rate tax = £40
Nett is £160
Penalty due = £100
So actual return is £60
(if you have not accrued sufficient interest to cover the penalty -it is deducted from your capital):eek:
For higher rate tax payers additional tax will be due as normal, on the full amount of interest received

As far as I can see only the HBOS accounts specify loss of "actual interest" and hence reduced tax liability, rather than a "penalty = X days loss of interest"

DavidAC

It is not clear if the interest deducted is at the gross or net rate. They will pay interest net of 20% tax. Do they deduct the penalty at the gross equivalent of 90 days ot net equivalent? If it is the net equivalent I think Martin's example in the Banking and Savings section of this site is only accurate for non tax payers.

twokcc

D1zzy wrote: »

Its a Penalty not actual interest, so the full amount of interest is payable upto the withdrawal date and tax is due on the full amount. eg
Suppose you have accrued £200 in interest
and 90 days interest = £100

Gross interest = £200
Basic rate tax = £40
Nett is £160
Penalty due = £100
So actual return is £60
(if you have not accrued sufficient interest to cover the penalty -it is deducted from your capital):eek:
For higher rate tax payers additional tax will be due as normal, on the full amount of interest received

But if you had to complete a tax return would you not report your income as £100 (£200-£100) with tax paid of £40 and therefore be due a tax refund from HMRC of £20? Anyone know if this would comply with HMRC rules it seems unfair that HMRC keeps tax on money that you didn't have as income.

D1zzy

twokcc wrote: »

But if you had to complete a tax return would you not report your income as £100 (£200-£100) with tax paid of £40 and therefore be due a tax refund from HMRC of £20? Anyone know if this would comply with HMRC rules it seems unfair that HMRC keeps tax on money that you didn't have as income.

The tax certificate from NSI will tell you how much interest you received - tax is due on the full amount of gross interest irrespective of any penalty. The penalty has nothing to do with the interest paid or tax due

D1zzy

DavidAC wrote: »

It is not clear if the interest deducted is at the gross or net rate. They will pay interest net of 20% tax. Do they deduct the penalty at the gross equivalent of 90 days ot net equivalent? If it is the net equivalent I think Martin's example in the Banking and Savings section of this site is only accurate for non tax payers.

Investigated this with respect to Northern Rock (when we were panicing about withdrawing money early) - in that case the penalty was based on Gross interest (which makes sense as that's how interest is calculated) and I have always assumed that whenever there is a similar penalty it would be based on Gross Interest.

intalex

Individuals are likely to pay the penalty based on the gross rate, which will be recognised as income for the bank, and hence the bank will be taxed on the corresponding profit (probably the entire penalty income).