Tax on Penalty Interest

ffacoffipawb

Savings Account A - interest received of £2,000 net / £2,500 grossed up.

Savings Acount B - fixed rate bond closed early. Net interest received of £400 net / £500 grossed up. however a £1,000 early closure penalty gross has been levied.

How much grossed up interest goes on tax return - £3,000 or £2,000? i.e. can I deduct the penalty as it is negative interest received?

Thanks

PS: Numbers are just for ease of calculation here.

opinions4u

In the past account providers used to reduce the interest paid and this would be offset for tax purposes.

At some point this changed and it became a fee equivalent to an amount of gross interest. Probably demanded by HMRC.

So you won't be able to set the fee against your tax bill.

Your withdrawal fee is not part of the interest calculation.

ffacoffipawb

opinions4u wrote: »

In the past account providers used to reduce the interest paid and this would be offset for tax purposes.

At some point this changed and it became a fee equivalent to an amount of gross interest. Probably demanded by HMRC.

So you won't be able to set the fee against your tax bill.

Your withdrawal fee is not part of the interest calculation.

Thanks.

Not the answer I wanted, but the anwer I suspected.

I needed £x. I have 2 bonds with £x in each one.

Bond 1 pays 5% and runs to 31 July next year. 90 day notice and no interest penalty. Notice given in Feb. Newcastle BS.

Bond 2 pays 3.55% runs to November 2013. Has a 270 day gross interest penalty. Nationwide BS 3 year eBond.

Decided to take the penalty for bond 2 and let the notice for Bond 1 lapse as 5% is too good to lose.

Probably a marginal decision given the penalty but I prefer to keep the 5%.

Haven't worked out if this was the best decision financially!