How to tax interest on old endowment

pipersand

I had an untied endowment mature in November 2004 at a value of 20000. Due to moving house, losing paper work and life getting in the way I didn't cash in my endowment until November 2007.

Late payment interest was then calculated in Nov 2007 for the extra 3 years at a total of 2500. This was taxed at 20% so reduced by 500.

I have now retired and I'm now just looking over my tax affairs for my income:
04-05 paid 22%
05-06 paid 22%
06-07 paid 10%
07-08 paid 0%
08-09 paid 20%

Now my question is: How do HMRC tax the late payment interest of 2500 that I received in Nov 2007 since I was a non tax payer for my other income in 07-08?

I have paid 20% on this should it have been zero or do they tax the interest proportionally over the 3 years ie: covering each of the 4 tax year? Am I possibly due a refund?

Could anyone point to where I could read the rules about this kind of thing- thanks

John_Pierpoint

I had a similar situation, but the other way round. The payment took me into additional rate tax.
As far as HMRC was concerned the interest was "earned" by me when the payment was actually made to me. (it seemed that these rules dated back to the mid 1990's)

But I am no expert, someone with greater knowledge should be along soon to advise if you can make a repayment claim.

Mikeyorks

pipersand wrote: »

Now my question is: How do HMRC tax the late payment interest of 2500 that I received in Nov 2007 since I was a non tax payer for my other income in 07-08?

The interest payment created in Nov 07 is wholly taxable in 07-08. It can't be apportioned to the years to which it relates.

HMRC_website wrote:

You pay tax on your interest in the tax year that the interest is paid to you (or credited to your account) even if you’ve earned part of it in previous tax years.

You need to add the gross interest to your other gross income in 07-08. If the total is less than the personal allowance (£5225 if under 65) - then all the £500 tax is refundable. if it exceeds £5225 then the portion up to £5225 is fully refundable and any balance up to (£5225 + £2230 = ) £7455 will only be charged at the starting tax rate of 10%.

http://www.hmrc.gov.uk/rates/itarchive.htm

You need to claim via HMRC. A simple letter but enclosing the statement showing the tax deducted (copy it first) should suffice. Or use R40.

Personally I'd do it via letter - but do it now as refunds for 05-06 / 06-07 and 07-08 all pass their sell by date in Jan / Mar / April of 2012 :

http://www.hmrc.gov.uk/incometax/tax-free-interest.htm#3