Tax on cash interest - cash or accrual basis or either?

itwasntme001

I just wanted to confirm how interest on cash savings (via savings bonds or easy access) is taxed; for any particular tax year is the amount of interest in consideration for that tax year based on when it was paid (cash basis) OR when it was earnt (accrual) OR could I possibly chose between the two?  I am pretty sure it is cash basis only but want to be 100% sure in order to help make decisions based on whether i receive interest monthly or yearly in order to manage and mitigate the amount of tax i will eventually pay.

Many thanks!

wmb194

It's based on the arising basis i.e. when it is paid. The only way to affect the timing is to choose accounts that pay interest at different points in the year or, rarely seen, at the end of a multi-year term.

itwasntme001

Just as i thought, thanks.  So just to confirm I can not chose (on a self assessment tax return) to have it taxed on an accrual/earnt basis?

schiff

No. A good example of split interest is Virgin who pay RS interest in March or October during the course of the saving year, which means that interest on one account often falls into two tax years. 

RG2015

It is not quite as clear cut as that. I have some three year NS&I bonds where all the interest is paid out after three years. However, 12 and 24 months after opening, the annual interest was added to the accounts. Furthermore, these amounts were reported to HMRC in the relevant tax years.

PS. These accounts allow early access although one would lose 90 days interest by doing this. This is perhaps what gives rise to a potential annual tax liability.

Linton

RG2015 said:

It is not quite as clear cut as that. I have some three year NS&I bonds where all the interest is paid out after three years. However, 12 and 24 months after opening, the annual interest was added to the accounts. Furthermore, these amounts were reported to HMRC in the relevant tax years.

This is normal.  The interest is regarded as having been paid when it appears in the account, whether you have access to it is irrelevent.  With a few accounts you dont see any interest added until maturity.

bowlhead99

Linton said:

RG2015 said:

It is not quite as clear cut as that. I have some three year NS&I bonds where all the interest is paid out after three years. However, 12 and 24 months after opening, the annual interest was added to the accounts. Furthermore, these amounts were reported to HMRC in the relevant tax years.

This is normal.  The interest is regarded as having been paid when it appears in the account, whether you have access to it is irrelevent.  With a few accounts you dont see any interest added until maturity.

That's not a very clear answer because whether you have access to it is very relevant. From HMRC's perspective it's taxable when it's made available to you... but see below: 

PS. These accounts allow early access although one would lose 90 days interest by doing this. This is perhaps what gives rise to a potential annual tax liability.

RG2015's suspicion is correct, that HMRC will consider that the money has been made available to you when it's been credited to an account that you can access (e.g. by early withdrawal or closure, even if that costs you a penalty).

If they haven't credited the money to the account, it simply isn't there yet and has not been made available to you. If they credit it to the account (which you might expect them to do after a year, because you want it to start to compound that interest for the next period), then it has been made available to you unless withdrawals are prohibited. If they're not prohibited, and you can have your money back along with the interest simply by asking for it and paying  the agreed penalty for access earlier than end of term, then the interest is 'available to you' (even though a moneysaving expert might not seek to gain access to it, they could have it if they wanted it, so HMRC consider it paid).

You could look at it as, NS&I say you have access to it, but you are not taking advantage of the opportunity to access it yet because you have agreed you'll forfeit a penalty if you do choose to access it.   HMRC would see the interest has been paid to an account in your name which you can access; hence taxable on you as the recipient, even if you won't choose to go and collect your money until there's no threat of penalty for doing so.

ratechaser

bowlhead99 said:

Linton said:

RG2015 said:

It is not quite as clear cut as that. I have some three year NS&I bonds where all the interest is paid out after three years. However, 12 and 24 months after opening, the annual interest was added to the accounts. Furthermore, these amounts were reported to HMRC in the relevant tax years.

This is normal.  The interest is regarded as having been paid when it appears in the account, whether you have access to it is irrelevent.  With a few accounts you dont see any interest added until maturity.

That's not a very clear answer because whether you have access to it is very relevant. From HMRC's perspective it's taxable when it's made available to you... but see below: 

PS. These accounts allow early access although one would lose 90 days interest by doing this. This is perhaps what gives rise to a potential annual tax liability.

RG2015's suspicion is correct, that HMRC will consider that the money has been made available to you when it's been credited to an account that you can access (e.g. by early withdrawal or closure, even if that costs you a penalty).

If they haven't credited the money to the account, it simply isn't there yet and has not been made available to you. If they credit it to the account (which you might expect them to do after a year, because you want it to start to compound that interest for the next period), then it has been made available to you unless withdrawals are prohibited. If they're not prohibited, and you can have your money back along with the interest simply by asking for it and paying  the agreed penalty for access earlier than end of term, then the interest is 'available to you' (even though a moneysaving expert might not seek to gain access to it, they could have it if they wanted it, so HMRC consider it paid).

You could look at it as, NS&I say you have access to it, but you are not taking advantage of the opportunity to access it yet because you have agreed you'll forfeit a penalty if you do choose to access it.   HMRC would see the interest has been paid to an account in your name which you can access; hence taxable on you as the recipient, even if you won't choose to go and collect your money until there's no threat of penalty for doing so.

Well that's an interesting one... like (I suspect) most people, when I have in the past had multi-year fixed rate accounts with no access, I've reported the interest on my tax returns annually, as it accrues.

Now in the scheme of things it's unlikely to have made any difference to my tax bill whether I did it that way or if I had reported all interest in the year of maturity, but there is clearly a bit of an opportunity if you are are a higher earner a few years away from retirement. Because you could opt for a longer term fix, knowing that the final interest tax liability would be lower than if you were still working and reporting year by year.

A bit niche admittedly, but I think I will keep that idea in my back pocket...

itwasntme001

So can you actually opt to report it on an accrual basis?  If not then ratechaser would have filled his/her tax return incorrectly?

coyrls

ratechaser said:

bowlhead99 said:

Linton said:

RG2015 said:

It is not quite as clear cut as that. I have some three year NS&I bonds where all the interest is paid out after three years. However, 12 and 24 months after opening, the annual interest was added to the accounts. Furthermore, these amounts were reported to HMRC in the relevant tax years.

This is normal.  The interest is regarded as having been paid when it appears in the account, whether you have access to it is irrelevent.  With a few accounts you dont see any interest added until maturity.

That's not a very clear answer because whether you have access to it is very relevant. From HMRC's perspective it's taxable when it's made available to you... but see below: 

PS. These accounts allow early access although one would lose 90 days interest by doing this. This is perhaps what gives rise to a potential annual tax liability.

RG2015's suspicion is correct, that HMRC will consider that the money has been made available to you when it's been credited to an account that you can access (e.g. by early withdrawal or closure, even if that costs you a penalty).

If they haven't credited the money to the account, it simply isn't there yet and has not been made available to you. If they credit it to the account (which you might expect them to do after a year, because you want it to start to compound that interest for the next period), then it has been made available to you unless withdrawals are prohibited. If they're not prohibited, and you can have your money back along with the interest simply by asking for it and paying  the agreed penalty for access earlier than end of term, then the interest is 'available to you' (even though a moneysaving expert might not seek to gain access to it, they could have it if they wanted it, so HMRC consider it paid).

You could look at it as, NS&I say you have access to it, but you are not taking advantage of the opportunity to access it yet because you have agreed you'll forfeit a penalty if you do choose to access it.   HMRC would see the interest has been paid to an account in your name which you can access; hence taxable on you as the recipient, even if you won't choose to go and collect your money until there's no threat of penalty for doing so.

Well that's an interesting one... like (I suspect) most people, when I have in the past had multi-year fixed rate accounts with no access, I've reported the interest on my tax returns annually, as it accrues.

Now in the scheme of things it's unlikely to have made any difference to my tax bill whether I did it that way or if I had reported all interest in the year of maturity, but there is clearly a bit of an opportunity if you are are a higher earner a few years away from retirement. Because you could opt for a longer term fix, knowing that the final interest tax liability would be lower than if you were still working and reporting year by year.

A bit niche admittedly, but I think I will keep that idea in my back pocket...

How have you read that post and come up with the idea that you should report all interest at maturity?  You are doing the right thing; reporting interest in the tax year in which it is added to the account.  There is no option to report all the interest at maturity.

ratechaser

itwasntme001 said:

So can you actually opt to report it on an accrual basis?  If not then ratechaser would have filled his/her tax return incorrectly?

Quite possibly, but I'm invariably stuffed for 45% tax on it all, so not like I've underpaid anything. The one thing that's making me wonder though - I'm pretty sure that I'd have got an interest statement on an annual basis. Likewise, in the old days of taxing interest at source, it would have been done as it accrued annually, which seems at odds with the idea that tax is only due when the money was available to you...