Early withdrawal penalties & tax

Hopeful_saver

I wanted to withdraw the full amount from my AA 2 year fixed rate savings account and, as the penalty is 180 day's interest, I waited 180 days before writing to close the account. I was horrified to find it cost me 180 days interest PLUS 20% tax on the interest. I never received the interest as income, so I queried this with the AA, but they are adamant that the tax is due. It's not really clear to me from the terms and conditions.

Is the AA correct? Can I reclaim the tax in my Self Assessment?

Probably the answers are Yes to the first and No to the second

dunstonh

I was horrified to find it cost me 180 days interest PLUS 20% tax on the interest.

You lose 180 days interest at the gross rate. As it was never paid, you dont pay tax. (this is assuming that the interest has been accuring behind the scenes and not yet added to the account. If it has been can you confirm and that answer can be amended)

However, tax is payable on any interest you receive unless you have registered as being a non-taxpayer.

Hopeful_saver

dunstonh wrote: »

You lose 180 days interest at the gross rate. As it was never paid, you dont pay tax. (this is assuming that the interest has been accuring behind the scenes and not yet added to the account. If it has been can you confirm and that answer can be amended)

However, tax is payable on any interest you receive unless you have registered as being a non-taxpayer.

Thanks for this. The interest, according to the AA T&C, 'is calculated daily and is paid yearly' and so it was never paid into the account. Does this make a difference? I'm a basic rate tax payer.

dunstonh

As it was never added, it was never taxed.

So, an example....

If you were 300 days into the year then behind the scenes you have accrued 300 days of interest at the gross rate. It hasnt been paid to you yet do no tax is involved at this stage. They would then deduct 180 days leaving you 120 days accrued. They would then pay that 120 days interest with tax deducted at 20% unless you have registered as a non-taxpayer.

As you are a basic rate taxpayer you would expect the interest paid to be deducted with 20% tax.

Hopeful_saver

OK, I think I understand your calculation.
I was 180 days into the year and so expected to withdraw the whole sum deposited but without any interest added. I think from what you are saying that I was correct in my expectation. However, the AA have charged me tax on the 180 days interest, which they deducted from my original deposit.
I assume they paid it to HMRC and didn't keep it.