Savings account interest - to annual or not to annual?

SuJoOnline

Apologies for asking a potentially noddy question but here we go... I'm currently using an easy access savings account, the bonus (monthly) interest rate of which has finished, so am looking to switch. The best alternative account pays annual interest. My query is this... if I swap and the rate on the new account inevitably drops and I move the bulk of my money elsewhere again, how does the annual interest calculation work? I.e. if interest is calculated daily irrespective of when it is actually paid, I would still reap the benefits of a few months' interest on a large amount before earning something piddly on the £1 I'm obliged to leave in the account? I.e. I don't 'lose' the interest on the large amount of money I put into the new account even if the original amount of money is no longer in the account? Hope that makes sense and thanks in advance for advice!

colsten

Interest on savings accounts is calculated daily, based on the balance at the end of each day.  The accrued interest will be paid either monthly or annually

If you close an easy access savings account, you will get the interest that has accrued to the day of closure.

SuJoOnline

Thanks for your reply!

whitesmith

Just to add - to reply to the generality of the thread title - if you have say a fixed term account (let's say a 3 year bond) then if you opt for monthly interest then you pay tax on the interest received in each tax year ie it is spread over 3 years. If you opt for annual interest (added to the bond) then you pay interest on 3 years worth of interest at once (when the bond matures). 

This may or may not take you into a higher tax bracket or exceed your £1000 PTA depending on your other income.

colsten

whitesmith said:

Just to add - to reply to the generality of the thread title - if you have say a fixed term account (let's say a 3 year bond) then if you opt for monthly interest then you pay tax on the interest received in each tax year ie it is spread over 3 years. If you opt for annual interest (added to the bond) then you pay interest on 3 years worth of interest at once (when the bond matures). 

This may or may not take you into a higher tax bracket or exceed your £1000 PTA depending on your other income.

I don’t think interest payment works as you describe. Annual interest gets added annually, without tax deduction (all interest is paid w/o tax deduction). If the provider reports interest payments to HMRC annually, which they are supposed to do, it counts as taxable income even if you don’t have access to that interest before maturity. Some providers offer to pay the annual interest to an external account, such as your current account.

Whether you actually have to pay tax on the interest depends on your total taxable income. As does your personal savings allowance - it can be £1,000, £500 or £0.

whitesmith

I always thought that if you didn't have access to the interest (eg it is added to a 3-year bond) then it is not taxable in that tax year and only becomes (potentially) taxable in the tax year that the whole bond matures ie the key is if you are able to access the interest or not. Apologies if I was wrong.

SuJoOnline

Thanks for your reply. Fortunately (or not!) my total savings interest won't trouble HMRC too much!