Tax on cash incentives?

Bargain_Rzl

Just wondering...

When you receive a cash incentive for opening a new current account, or recommending somebody, or signing up for Egg Money Manager etc...

...is it taxed at the same rate as interest, or does it count as a non-taxable "gift"?

Last time I got a cash incentive for an account I was a student and therefore a non-taxpayer, so I haven't got a clue!

Tim_L

I believe these to be non-taxable ex-gratia payments. They're gifts, not interest payments.

Incidentally credit card cashback certainly isn't taxable, as it's a discount on expenditure rather than a cash payment.

lipidicman

So why dont banks do this with savings account - ie fixed for a year - deposit £1000 and we'll give you £60. Equivalent to 6% and tax free!

There must be a rule - but I got £50 from lloyds for maintaining a lower balance, so what gives?

jonesMUFCforever

Because if banks did this the IR would clamp down on it as tax evasion and it would be stopped.
If you are eligible to have interest paid gross all you need to do is ask for a form IR85 from your bank.
Eric

Milarky

lipidicman wrote:

why dont banks do this with savings account - ie fixed for a year - deposit £1000 and we'll give you £60. Equivalent to 6% and tax free!
There must be a rule - but I got £50 from lloyds for maintaining a lower balance, so what gives?

I've often thought of this in the past, too. I suspect it can be done legally but that the amount of effort required would make it difficult to market such products.

for credit cards...?
For instance what about a 'zero percent' deposit account - quite a few are 0.1 percent anyway! - against which a notional return could be generated via a rebate as 'cashback' for 'unrelated' use - such as purchases on a linked credit card? Eg: Deposit £1200 at 0% but get a special cashback card with rate of 3.9% upto £2,000 per year - 0.5% thereafter. If you work this out it equates to 6.5% net. Assuming that the issuer would have paid 1% cashback on the first £2,000 anyway - on their 'standard' card - they are therefore paying you [i.e. the 'cost' to them is] the equivalent of 4.83% interest.

I can't see this being deemed avoidance of interest since the card has to be used to gain the cashback - and if it is not used no cashback is generated, and the return on the £1200 is wasted.

.. and for ISAs too...?
Likewise, with ISA rates stuck at about 5% - and this on limited amounts - it could be possible to boost the return to the saver at no increased cost to the bank. What you could do in this case is open a £3,000 'qualifying account' [QA] which entitles you to an ISA that pays 10%. There would be no requirement to pay anthing into the ISA and no restrictions about withdrawals from there. The only thing you cannot touch is the 'QA'. Close the ISA or transfer it and the QA becomes accessible again. The way this works [if it were to work at all, that is] is that unless the saver deposits £3,000 into their ISA at the start and then leaves it there they will only get '10%' on a proportion of £3,000. Say they average £2,000 in the ISA instead. Then they get £200 interest on their £2,000 but this represents just £100 [£200 less 5% interest otherwise available on any ISA with a balance of £2,000 say] 'attributable' to the QA - a rate of 3.3%. The trick is therefore to always balance the ISA and the QA by maximizing the time/balance in the ISA.

The 'boost' to the saver in this case would come from getting between 1% and 2% [depending on individual tax status] more on £3,000 which - as it effectively gets added to ISA rather than taxable savings - continues to generate tax free returns.

As you can see the ISA suggestion is a lot more complicated - and ISA rules are complicated enough already!.

[Oh well! Just a few thoughts for the taxonomists to shoot holes though!]