Calculating Interest for Tax Form

caveman38

My wife had a Bond mature in May this year. It had run for 2 years. In the previous tax years she was not liable for Tax as her earnings both from employment and interest was below her tax code plus free from tax element of interest ie.£1,000
However this tax year she will be liable and is confused (as I am) as to what part of the interest she will have to declare.
If the interest for the last year of the bond was paid in May 17. Will she be liable to declare all of that in the 17/18 form or do you estimate what the interest is for April - May only?

badger09

caveman38 wrote: »

My wife had a Bond mature in May this year. It had run for 2 years. In the previous tax years she was not liable for Tax as her earnings both from employment and interest was below her tax code plus free from tax element of interest ie.£1,000
However this tax year she will be liable and is confused (as I am) as to what part of the interest she will have to declare.
If the interest for the last year of the bond was paid in May 17. Will she be liable to declare all of that in the 17/18 form or do you estimate what the interest is for April - May only?

You/your wife have to declare the amount of interest credited in the tax year - no estimates required.

So, for a 2 year bond taken out in 2015 with interest credited in May she would declare interest credited May 2016 in tax year 2016/17, and interest credited May 2017 in tax year 2017/18.

lpgm

If I understand you correctly, then I think she'll have to put the whole amount down. It's seen as income for the whole 17/18 tax year, rather than some shorter period of it.

caveman38

badger09 wrote: »

You/your wife have to declare the amount of interest credited in the tax year - no estimates required.

So, for a 2 year bond taken out in 2015 with interest credited in May she would declare interest credited May 2016 in tax year 2016/17, and interest credited May 2017 in tax year 2017/18.

Thanks. Are you therefor saying that although for 11 months of that final year when she wouldn't be paying tax on that interest. She unfortunately will have to pay it in this financial year because that is when it was paid. Just bad timing.

bowlhead99

Yes, for UK tax purposes for individuals the system is quite simple - interest is taxable when it is paid to your or when it's made available to you by credit to your account.

So if none of the second twelve months-worth of accruing income was actually made available to you in 2016/17 tax year, but only in May 17, you wouldn't pull 11/12ths of that money back to 2016/17 tax year and have to pay tax on it as a piece of 2016/17 income item. It protects you from a tax charge on "dry income" ie needing to pay tax for a year in which you couldn't get your hands on the money to pay the tax.

It works just the same on smaller time periods too For example if you get paid interest in your current account on the last day of the month or the first day of a new month for the money that's been in your account since you were last paid an interest payment...then when you get paid on 30 April or 1 May, some of that interest was because you had money deposited with them on 1,2,3,4,5 April in the last tax year. But as it wasn't paid to you in that last tax year, you don't have to go back and strip out the five days of"last tax year" earnings and pay tax on it for that last tax year. You just say that all the income that got paid to you in May was received after 5 Apr and so it's *all* taxed in the tax year that started 6 Apr, not 5 days/25 days.

In your wife's particular case she would probably have been better off receiving some of it last year when she had spare allowances or whatever. Some people will look to use accounts with flexible withdrawal terms, or multiple accounts, to optimise what interest they get in what tax year based on how much other income they expect.

EdSwippet

bowlhead99 wrote: »

...It protects you from a tax charge on "dry income" ie needing to pay tax for a year in which you couldn't get your hands on the money to pay the tax.

Never heard the term "dry income" before -- that's a new one on me. :-)

In practice, it seems that paying tax on "dry income" is still entirely possible, with (ironically) NS&I being one of the major offenders:

An NS&I spokesman told Money Mail: 'The liability for tax will arise when the interest is added to the account, regardless of the fact customers may not cash in until the end of the term.'

Although I do not qualify for these particular NS&I products (too young!), I have held several other three-year and five-year NS&I 'Guaranteed Growth Bonds' over time and have always had to pay tax annually on the accrued interest, even though it is effectively inaccessible until the end of the bond term. The NS&I doc on these products is not at all clear on this.

Dazed_and_confused

caveman38

Sometimes you need to have to income above £16500 before you are able to benefit from the £1000 personal savings allowance tax rate of 0%.

What do you think your wife's taxable income, ignoring savings interest, will be this tax year?

caveman38

Dazed_and_confused wrote: »

caveman38

Sometimes you need to have to income above £16500 before you are able to benefit from the £1000 personal savings allowance tax rate of 0%.

What do you think your wife's taxable income, ignoring savings interest, will be this tax year?

£20-21K without savings interest.

Dazed_and_confused

She misses out on the starter savings rate (upto £5000 taxed at 0%) and will just get the smaller Personal Savings Allowance rate of 0%.

bowlhead99

EdSwippet wrote: »

Although I do not qualify for these particular NS&I products (too young!), I have held several other three-year and five-year NS&I 'Guaranteed Growth Bonds' over time and have always had to pay tax annually on the accrued interest, even though it is effectively inaccessible until the end of the bond term. The NS&I doc on these products is not at all clear on this.

It is available to you. It is in the account for you if you want to take it out. And the fact it's credited to the account is how your overall return is able to compound up over the term rather than simply giving you the lower amount you would get from simple flat interest for the 3 years or whatever.

However, with that sort of account you'll have agreed that if you want to take the money out earlier than the end of the term, there would be an admin fee equivalent to X months' interest, hence you prefer not to do that, and let it 'roll up' untouched by your fair hand, but that is not the same as saying the interest doesn't happen until the last year.

polymaff

EdSwippet wrote: »

"An NS&I spokesman told Money Mail: 'The liability for tax will arise when the interest is added to the account, regardless of the fact customers may not cash in until the end of the term.' "

I have held several other three-year and five-year NS&I 'Guaranteed Growth Bonds' over time and have always had to pay tax annually on the accrued interest, even though it is effectively inaccessible until the end of the bond term. The NS&I doc on these products is not at all clear on this.

No change there, then :rotfl:

The recent GGBs are, of course, accessible.