Tax question 3 year pensioner bonds

briskly_2

The 3 year bonds paying 4% seem a pretty good deal and I'm recommending them to my Mum. It is good that you can draw money out early - even thought there is loss of 90 day's interest. This got me wondering - what is the tax position on this penalty? Can you count the penalty as a loss to offset it against tax due on any other savings income?

LXdaddy

I assume you mean that if you cash out within the first 90 days you get back less than you invested does that count as a loss to offset someother interest gains. I don't think so.

In another thread someone pointed out that the calculation is such that you earn the interest up to the date you withdraw (and have to pay tax on that interest. AND you get a penalty of the equivalent of 90 days lost interest.

briskly_2

I was thinking that, say you invested £10,000 in the 3 year bond - after 1 year it would accrue £400 in interest - £320 after basic rate tax. Say you had to close the bond just after this had been added - NS&I would charge a penalty of around £100, which would presumably have to be listed as a charge. Say you had £600 gross income from other savings, I would argue that your total tax for the year should be 20% of( £400 + £600 - £100) or £180 instead of £200 - ie the NS&I penalty should be treated as a loss. Does this make sense?

teddysmum

It makes sense, but the tax people do as they please.

Archi_Bald

I don't think it works like you want it to work. As you say, NS&I will charge a penalty for early withdrawal. That's very different to a reduction in the interest. The penalty just happens to be the equivalent of 90 days interest, and you would have to pay it in full even if you closed your account 10 days after opening it, for instance.

The only conclusive answer can be given by HMRC though, so you should contact them with your question.

Archi_Bald

teddysmum wrote: »

It makes sense, but the tax people do as they please.

I beg to differ, it doesn't make sense.