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

masonic

RG2015 wrote: »

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

It is only obliged to issue a tax certificate if interest is paid during the period. It could issue a tax certificate showing zero interest, but that wouldn't serve any purpose. HMRC treats interest as being taxable in the tax year the account holder benefits from the interest - in practice, for a fixed term account where interest is paid into the account, this would mean when interest is paid and compounded. Products in which unpaid interest is declared are the questionable ones.

PeacefulWaters

Just to confirm:
http://www.ybonline.co.uk/personal/savings/fixed-term-and-notice-accounts/term-deposit/

Guaranteed interest rates - up to 1.11% Gross*/1.10% AER+. This rate is available on the 3 year Term Deposit – Interest Capitalised at Maturity account.

In the past, ideal if you're moving to a lower income tax band between opening and maturity.

RG2015

This is a fascinating conversation and if I open a fixed term account I will make sure I read the T&Cs to ensure I am not caught out by the tax period issue.

I will also admit to confusing a bank paying interest into an account and making the interest available to withdraw. My mistake.

bowlhead99

Basically as masonic says, the interest is yours when you benefit from it: i.e. if it gets paid to you by being dumped into a separate account that you own, or it gets credited to the account and you can withdraw it, or just gets credited to the account for compounding purposes and you have an ability to access the account contents e.g. by closing the account (even if that might cost you some sort of penalty so you choose not to close it).

Products can be specifically designed to operate like bonds that pay all interest and principal on a set day in the future with no early access, in which case no interest is declarable to the taxman until you get paid at the end. However they are relatively less popular than they might have been in the past, because:

- everyone has an annual savings interest allowance (so it's more tax efficient for many people to have the interest treated as 'dripped' over to you across multiple years than receive a big payout in one year at the end); and

- interest rates are relatively low these days (so if the product is deemed as annual paying, at least when you have to pay annual tax funded from your own back pocket, it will not be on huge amounts of income)

So, a product that pays (or is treated as paid) interest as you go along - instead of at the end - is relatively more popular than if interest rates were 10% with no annual allowances; in that historic case, some would find it hard to pay high taxes on high levels of income which were in practice difficult to access, so they would prefer a 'credit everything on maturity' like the YB product.

It's true that if unpaid interest was declared to HMRC, that would be questionable. But most products where it appears that "unpaid interest is declared" are not really "questionable" if you look at why it is that they deem the interest to be paid:

If you take for example NS&I's "65+ bonds" (just as an example that I was talking to parents about the other day), the product terms specifically state that "for the 3-year bond, we'll add interest every year, so you will get the benefit of compound interest" and the account can be closed at any time with a penalty equivalent to 90 days interest. So, there's no doubt that money is being credited to your account annually and they are happy for you to withdraw the money if you pay a fee to do so. If you sign up for those account conditions it is not "questionable" whether HMRC would see you had been credited the income each year - it is quite clear and explicit that you have been credited it and you can walk away and keep it (subject to standard penalties to compensate NS&I) if you would like.

masonic wrote: »

It is only obliged to issue a tax certificate if interest is paid during the period.

Just to be a pedant, I'm not sure that the banks are 'obliged' to issue tax certificates any more. Issuance of a tax certificate every year interest was paid, used to be mandatory under banking regulations - because every time interest was paid, tax was withheld, and your tax certificate was your 'receipt' that money had been paid to HMRC on your behalf.

These days there is no withholding at source. So, banks are still obligated to give you a statement to explain your account movements if there has been a movement (e.g. interest paid; which might be zero some years in the case of the Yorkshire product referenced above) but I don't think they are 'obligated' by HMRC or government to produce a certificate for their customers aligned with tax year ends to say what interest has been paid.

They do it as a free bit of customer service because they know the customers want it to make tax returns easier, but not because they have to. As long as they have provided the customer with a statement (which could be an online statement) which shows when the interest hit the account or was earned and paid to a separate account, that's fine. They shouldn't be running foul of banking law if they don't produce an April-April statement for the customer, but they generally have system reports set up to produce them and if they don't, they risk losing a customer who demands that convenient summary statement as if it were their right to have it... so they make them available.

ermine

Sceptic001 wrote: »

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

You are absolutely right and I will get £32k the heck out of there ASAP. :eek:Thank you for the heads-up!

RG2015

@bowlhead99

Thank you for your excellent and comprehensive post. It is posts like these that make the MSE forum such an invaluable source of information.

In a previous life, I often argued with the auditors regarding my employer's accounting policy on accruals and prepayments. They even suggested the we were manipulating the figures to gain the maximum tax benefit. As if.

EachPenny

ermine wrote: »

You are absolutely right and I will get £32k the heck out of there ASAP.

When did you open the account - i.e. was it before or after the July 2013 T&C's change?

The £50k limit for accounts opened after July 2013 should be a limit on the amount you can deposit into the account, not the limit on the amount they pay interest on. I thought normally if a deposit takes you over the account limit the deposit is returned to where it came from either in full, or the amount in excess of the account limit.

If NW accepted deposits taking you up to £81k it kind of implies that your account is a pre-July 2013 one. If not, then they shouldn't really have allowed you to deposit money which wasn't going to be earning interest. Worth investigating more.

ermine

EachPenny wrote: »

When did you open the account - i.e. was it before or after the July 2013 T&C's change?

Definitely after - in Sept 2016 so no chance. I've had a general NW account for much longer, but that account only since last year. The extra over 50k has only been in there between last night and this morning so I'll let them off the possible 63p

EachPenny

In which case they probably haven't had time to notice it and return the payment yet.

Lucky you were alerted to the limit before it sat there too long

Sceptic001

isasmurf wrote: »

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

Thanks for that info, isasmurf.

Good to know that some loyal NW customers are more equal than others.:(