Savings accounts paying interest yearly - is tax incurred on accrual or payout?

ermine

I am looking at buying a house in another county before I have sold the old one. Eventually I will have about half a house worth of cash, ready for my part of the purchase as a cash buyer. I need to manage the paltry interest I get so it fits under the new £1000 personal savings allowance, and it is not clear to me when interest paid is booked for tax purposes

I have a Nationwide Flex regular saver, opened June 2016. They pay interest yearly, so I get the interest in June 2017. Haven't received any interest so far although presumably I have accrued it at ~5%/12*balance from June 2016. I added £500 a month and it will end up about £6k, so to a first approximation I will get 5% of about half the end balance.

So if for the sake of argument they pay me ~£150 interest in June 2017, is this entirely falling in the 2017/18 tax year even though most of it was accrued last tax year? This would seem logical to me, to book it when the interest actually shows up.

I then have a Loyalty Saver at 0.75% which they say they will pay annually on 31 December. I have £81k in this from May, so by December I will have 8 months/12 * 0.75/100 * 81,000 = £405

So far I will have got £555 interest. But if I am unlucky and fail to find a house I want to buy, I will still be accruing interest by next April, although Nationwide won't be paying it out until the next tax year (2018/19).

My question is, is the personal saving allowance taken literally, as in when the interest is actually paid out to me, or do I pay tax as it is accrued, ie I have to compute the running total?

In the first case it's £555, in the latter case it is 0.75/100*11/12 * 81,000=£557 + £150 + them paying 1% of ~ £6000 on the Flex regular saver, so a total of about £770, even though I don't actually get hold of the difference till the new tax year?

ffacoffipawb

ermine wrote: »

I am looking at buying a house in another county before I have sold the old one. Eventually I will have about half a house worth of cash, ready for my part of the purchase as a cash buyer. I need to manage the paltry interest I get so it fits under the new £1000 personal savings allowance, and it is not clear to me when interest paid is booked for tax purposes

I have a Nationwide Flex regular saver, opened June 2016. They pay interest yearly, so I get the interest in June 2017. Haven't received any interest so far although presumably I have accrued it at ~5%/12*balance from June 2016. I added £500 a month and it will end up about £6k, so to a first approximation I will get 5% of about half the end balance.

So if for the sake of argument they pay me ~£150 interest in June 2017, is this entirely falling in the 2017/18 tax year even though most of it was accrued last tax year? This would seem logical to me, to book it when the interest actually shows up.

I then have a Loyalty Saver at 0.75% which they say they will pay annually on 31 December. I have £81k in this from May, so by December I will have 8 months/12 * 0.75/100 * 81,000 = £405

So far I will have got £555 interest. But if I am unlucky and fail to find a house I want to buy, I will still be accruing interest by next April, although Nationwide won't be paying it out until the next tax year (2018/19).

My question is, is the personal saving allowance taken literally, as in when the interest is actually paid out to me, or do I pay tax as it is accrued, ie I have to compute the running total?

In the first case it's £555, in the latter case it is 0.75/100*11/12 * 81,000=£557 + £150 + them paying 1% of ~ £6000 on the Flex regular saver, so a total of about £770, even though I don't actually get hold of the difference till the new tax year?

For tax purposes, as it is actually received / paid.

Plus

Agreed, when it's credited to your account - ie the date an entry for interest shows on your statement. Many fixed rate accounts won't allow you to access that money (eg 2 years into a 5 year term) but the interest is still taxed for that year.

For this reason, depending on account T&C it can sometimes be useful to close an account early to bring forward the tax liability (eg if you expect to go up a band, or exceed your PSA) or there have been a few multi-year accounts that roll up the interest and pay it in a lump at the end (handy post-retirement) - though I can't think of any currently available.

RG2015

Hi @ermine,

@ffacoffipawb is correct but if you have a fixed period of more than one year the bank will declare the interest annually. So if you have a 5 year account the interest may only be paid after 5 years but each year the annual interest will be taxable in the tax year in which it is declared.

Some banks declare annual interest on a set day each year and others on the anniversary of opening the account.

This can also affect monthly accounts but to a lesser effect. My Santander current account pays interest on the 7th of the month so I received my monthly interest on 7th April 2017 but whilst being mostly accrued in 2016/2017 it falls into the 2017/2018 tax year.

All banks will provide an annual statement of interest received to help you with your tax return.

EachPenny

ermine wrote: »

I then have a Loyalty Saver at 0.75% which they say they will pay annually on 31 December. I have £81k in this from May, so by December I will have 8 months/12 * 0.75/100 * 81,000 = £405

Obviously tax is something to take into account, but I'd be slightly more concerned about having £81,000 in Nationwide's Loyalty Saver at 0.75%, there are lots of places you can get a higher rate of interest, added to which with your Regular Saver you would be over the £85k FSCS limit with Nationwide.

Even assuming you've taken advantage of other current accounts and regular savers, you could still be getting 1% (or more) on the £81,000 with a comparable level of easy access and keeping it together in one pot. Getting 0.75% rather than 1% already means you are losing more than the equivalent of paying basic rate tax on the interest.
:eek:

I've drained my Loyalty Saver, only keeping it in case the interest rate goes up one day, however unlikely that is.

ermine

EachPenny wrote: »

Obviously tax is something to take into account, but I'd be slightly more concerned about having £81,000 in Nationwide's Loyalty Saver at 0.75%, there are lots of places you can get a higher rate of interest, added to which with your Regular Saver you would be over the £85k FSCS limit with Nationwide..

The trouble with holding the cash to buy a house is you don't know when you need to deploy it, but you need access right there and right now, pronto. The downside of not having it is missing out or incurring costs. I can eat a sub-par interest rate for access.

@all many thanks for the heads up that it's when paid. Part of the reason this is an issue is that I am springing 43k from my SIPP this year, I don't want to end up with too much taxable as I am £2k off the HRT threshold. I can of course put £3600 into the SIPP to give more headroom, but to carry two houses I need as much instant access capital as I can get for the overlap.

EachPenny

ermine wrote: »

The trouble with holding the cash to buy a house is you don't know when you need to deploy it, but you need access right there and right now, pronto. The downside of not having it is missing out or incurring costs. I can eat a sub-par interest rate for access.

Presumably you'd have at least 24 hours notice, maybe 48, that you are about to buy a house? Plenty of time to move money around from accounts which pay more than 0.75%.

E.g.

Santander 123 - £20,000 @ 1.5% - Instant Access
Bank of Scotland Vantage - £15,000 @ 2% - Instant Access
Club Lloyds - £5000 @ 2% - Instant Access

With just those three banks almost half your £81k could be earning double or more the rate you are getting on the Loyalty Saver. You can use online banking to transfer the money back to Nationwide and it will be there in a matter of minutes, maybe a bit longer with the Santander if they security check you.

PeacefulWaters

RG2015 wrote: »

Hi @ermine,

@ffacoffipawb is correct but if you have a fixed period of more than one year the bank will declare the interest annually. So if you have a 5 year account the interest may only be paid after 5 years but each year the annual interest will be taxable in the tax year in which it is declared.

Some banks declare annual interest on a set day each year and others on the anniversary of opening the account.

This can also affect monthly accounts but to a lesser effect. My Santander current account pays interest on the 7th of the month so I received my monthly interest on 7th April 2017 but whilst being mostly accrued in 2016/2017 it falls into the 2017/2018 tax year.

All banks will provide an annual statement of interest received to help you with your tax return.

As a rule of thumb the bolded bit is true.

But it is possible, albeit rare, for a fixed term deposit to pay interest on maturity only.

Yorkshire Bank used to design their product in such a way.

Sceptic001

EachPenny wrote: »

Obviously tax is something to take into account, but I'd be slightly more concerned about having £81,000 in Nationwide's Loyalty Saver at 0.75%, there are lots of places you can get a higher rate of interest, added to which with your Regular Saver you would be over the £85k FSCS limit with Nationwide.

I thought there was a £50k ceiling on deposits into the NW Loyalty Saver. Has this been scrapped?

isasmurf

Sceptic001 wrote: »

I thought there was a £50k ceiling on deposits into the NW Loyalty Saver. Has this been scrapped?

Depends when the Loyalty Saver was opened. £50kmax balance only applies to accounts opened since July 2013. Accounts opened before then have a £5m max balance

RG2015

PeacefulWaters wrote: »

As a rule of thumb the bolded bit is true.

But it is possible, albeit rare, for a fixed term deposit to pay interest on maturity only.

Yorkshire Bank used to design their product in such a way.

This does surprise me. Surely Yorkshire bank is obliged to issue a tax certificate every year irrespective of the actual payment date.