Problem with a fixed rate deposit savings account

stormy-weathers

Hello Everyone

I'm looking for some help.

My nephew invested £18,508.38 in a three year fixed
rate deposit account with a compound interest rate of 4.25% per annum
he is a non tax payer so no tax would be deducted from
the interest earned.The account has now matured
and he and the bank have a different maturity amount.
The bank are not being helpful despite my nephew trying to sort it out with them.
What would be the total amount on maturity.?

Thanks for your help

xylophone

£20,969.91?

steelbru

What was the AER figure given in the terms and conditions ?

Can you confirm that he filled in an R85 form to get the interest paid without tax ?

Archi_Bald

Not sure what you mean by "compound interest rate". Assuming the AER was 4.25% (was it?):

£20,969.91 if it is an ISA or if he had given the bank an R85.

£20,477.61 if it's not an ISA or he hadn't. He can claim tax back from the HMRC by means of an R40.

alanq

Some possible (unlikely?) reasons for discrepancies to eliminate from the enquiries.

I don't know if they were around 3 years ago but Nat West used to accept deposits into low interest feeder accounts that only began to pay the higher fixed rate starting at a later date.

The account was not a simple fixed rate account but a stepped rate account.

The account didn't have "compounded interest" but in fact paid the interest to a linked account.

The "3 year" bond was in fact only for approximately 3 years.

Some accounts permit multiple deposits while a bond is still on offer to new customers and not all of the funds were there for the full term.

The time taken for deposit cheque to clear / begin earning interest.

The bank placed the funds in an account other than that applied for.

Nephew has his sums wrong.

KGriff

Assuming the interest is added each year and the tax taken off at the usual 20% basic rate. I work it out as follows:

Day 1 - £18,508.38p
End of year 1 interest - £786.60 minus 20% tax (£157.32) = £629.28

So £19,137.66 carried forward to year 2.
End of year 2 interest - £813.35 minus 20% tax (£162.67) = £650.68

So £19,788.34 carried forward to year 3.
End of year 3 interest - £841.00 minus 20% tax (£168.20) = £672.80

Giving a final total of £20,461.14

This assumes that no R85 form was completed to begin with and therefore any tax deducted each year was to be reclaimed using a self assessment form or form R40.

Had their been an R85 form applied to the account then the total would have been £20,969.91 I believe, as stated by xylophone in this thread.

PeacefulWaters

It would help if the OP simply provided the figures and dates involved.

KGriff

PeacefulWaters wrote: »

It would help if the OP simply provided the figures and dates involved.

True. I reckon someone didn't add the R85 form on the account and that has led to the dispute.

Can somone provide me with some info though too please. As my wife and I are both tax payers, we have never had occasion to use the R85 form on any of our savings. Nor have we ever tried to claim the tax back using form R40

But I assume, where there is a 3 year fixed savings, such as the one described by the OP that a person should be able to claim back not just the interest but the 'interest on the interest' ie the compounded interest or is it just a case you can only claim back each years annual interest without it being compounded?

Secondly, should a person claim back the interest each and every financial year (submitting three R40 forms in total) or can they wait the three years to claim it all back with one R40 form?

If anyone knows the correct position, it may be useful to know and clarify what people can (and cannot) claim back.

It appears to me in the scenario described by the OP here, that the R85 form being applied to the account from the onset, would have been the best thing to do to obtain the highest return for his nephew.

Eco_Miser

Banks don't actually do 'compound interest'.
That is, they calculate interest on whatever the current balance is, and pay that interest into the account (or some other account) at intervals, in this case yearly. But there is no special calculation of 'interest on interest', it's just that the balance on which interest is calculated in the second and subsequent years includes the interest already paid into the account.
As for the R40, I've never done it, but I'd rather the refund be in my pocket than the chancellor's.

alanq

KGriff wrote: »

But I assume, where there is a 3 year fixed savings, such as the one described by the OP that a person should be able to claim back not just the interest but the 'interest on the interest' ie the compounded interest or is it just a case you can only claim back each years annual interest without it being compounded?

You don't claim back INTEREST. You claim back the TAX that you have paid in excess of the total amount that was due in each tax year.

KGriff wrote: »

Secondly, should a person claim back the interest each and every financial year (submitting three R40 forms in total) or can they wait the three years to claim it all back with one R40 form?

"Every claim year needs a separate claim form."
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/419507/R40_Notes__2015_internet_v2.0.pdf

KGriff wrote: »

It appears to me in the scenario described by the OP here, that the R85 form being applied to the account from the onset, would have been the best thing to do to obtain the highest return for his nephew.

If ones total income exceeds ones tax allowances then one is ineligible to use an R85. If any tax is due then interest must be paid net of tax and the excess tax reclaimed later.

Unless the next government changes the plans announced in the recent budget, from the tax year 2016-2017 all interest will be paid gross and no tax will be due on the first £1000 of interest. Any tax that is due will then have to be collected later.

KGriff

alanq wrote: »

You don't claim back INTEREST. You claim back the TAX that you have paid in excess of the total amount that was due in each tax year.

Sorry I meant tax on the interest .. Silly mistake on my part. Your other answers have been really helpful alanq and clarified the position. Thanks very much.

I reckon the OP has discovered the tax was taken off the account each year in his nephews case and therefore they have ended up with a much reduced amount. I hope stormy-weathers clarifies what actually has happened.

Not much they can do about the previous years deducted tax perhaps, but I assume they will claim it back for the last year.