NS&I 3 year bond cash in early, tax query?

andy_poulton

Good morning.
Can someone just advise me if this is correct.
I have had to cash in my 3 year bond early after 12 months.
Roughly speaking this means:-
3 months interest penalty. [so 9 months interest] as we know.

The interest was about 800
less three months was about 600
less 20% tax equals 480.

NS&I or HMRC have calculated it differently:-
The interest was about 800
less three months was about 600
less the tax on 800 ? equals 440.

Is that a correct calculation then? 440 instead of 480

Thanks Andrew

[PS obviously better to talk to NS&I But sometime in the past year I was told, my password was corrupted so I cannot engage with them. We used my wife's log in but they still would not engage with her as my side was still corrupted and so would not help or discuss until a full reset done a few days later next week. Then we used her log in and did it electronically and it was approved it seems account closed and on its way.]

bowlhead99

It sounds like they are saying you have earned 800 of taxable interest and having received that net interest you need to pay them a fee for early closure when you want to withdraw your cash before the term is up.

Whereas you want to say that they reduced their interest rate and paid you less interest for the time your money was on deposit, instead of charging you a fee.

What do the terms and conditions say? I don't have one of those accounts but the consequence of early exit will be shown. I suspect they have it right rather than have been doing it wrong all these years for their hundreds of thousands of customers, but you never know.

andy_poulton

Thanks Bowlhead.
That is another slant on it.

I understand the T&c's and the early exit penalty.You lose 90 days of interest. I knew I was taking a hit [ it is only the same interest now as the 1 year bond in the end so fine. It is the TAX workings I did not get]

I suppose I mean.
12 months it has been in so:-
800 interest less tax = 640 [I would normally get.]
Early exit penalty 90 days loss of interest [3 months]
divided by 12 = 53 x 9 = 480

In there statement they have taken the 3 months penalty off at the previous gross rate not net after the net calculation.
Paying me 440.
The interest was about 800
less three months was about 600
less the tax on 800 ? equals 440.

Sorry

Cheers Andy

bowlhead99

Yes, so they have charged you a penalty fee equivalent to three months interest. They don't care whether you are a 20% taxpayer, or a 40% taxpayer who will owe more tax to HMRC, or a non taxpayer who will reclaim the tax from HMRC.

They just want you to compensate them for early exit by charging you a fee which equals the last three months interest that they, as a business with interest expense, have been paying out. And it sounds like at £800 a year, the penalty fee is going to be £200.

In the T&Cs for their bonds, it says that on the amount taken out there will be "a penalty equivalent to 90 days' interest, at the interest rate the certificate is earning, will be deducted from the payment". At the interest rate the certificate is earning, the equivalent amount to 90 days interest is £200, right?

As you don't dispute that this penalty should be £200, or that it should be deducted from their payment to you, it seems your argument is only on how much tax you pay on the interest you earned. From HMRC's perspective, you earned £800 interest and will pay £160 tax at 20%. If you are a 0% taxpayer you will claim it back. If you are a 40% taxpayer you will owe another £160. HMRC will not really care that you voluntarily paid a penalty to NS&I to access your money, whether the penalty is £1 or £1000. It is your choice to pay a penalty and doesn't change the amount of taxable interest you earned or the rate of tax that you pay on what you earned.

Your argument is that you did not earn all the interest. But if you multiply out the amount by the interest rate by the period they had your money, which was a year, you will find you did earn £800, as your own calculation shows.

QED

andy_poulton

Thanks for the kind and very full reply again.

I fully understand where you are coming from and it as you suggest my interpretations.

That has given me complete understanding and for £40 will not take it to a tribunal [joke]

Thanks for all the help and the answers.

Cheers Andy

bowlhead99

I can see how you could easily get the wrong idea in your head about how it would work.

For example i saw some article somewhere along the lines of.... instead of doing a 1-year fix at 2.5% it was better to get a 2-year fix at 4% and then if you want to get out after a year, simply give up a penalty of one quarter of your interest income and it would be like you'd just got 3% for the year. Beat the system, brilliant!

However, that advice was for an ISA where there is no tax to worry about. In an "unwrapped" account, people face the issue you've just experienced, where the income you're getting is taxed, and therefore the *net proceeds* of the last 3 months interest earned is not enough to pay a penalty equivalent to the last three months interest earned. So overall it costs you more than three months of your net income and you feel like the effective interest rate dropped to lower than 3% even though the headline is that you're only losing a quarter.

andy_poulton

Yes I read that too.
It also related to this bond.
Only worked if you gave the 3 months notice and you got the full 4% too.
Thanks again.
Cheers Andy