Monthly interest on a Fixed Rate savings account and tax

refluxer

If I open a 1 Year Fixed Rate savings account and opt to have interest added to the sum monthly (not paid out), would that interest have to be declared (for tax purposes) according to the month it was paid into the account (as it will span two different tax years), even though the interest wouldn't effectively be received until the end of the 1 year term ?

I'm presuming that the answer is yes because the money is still effectively mine and the fact I can't access it isn't relevant as far as HMRC is concerned, but wanted to double-check my thinking was correct.

Thanks.

Daliah

You presume correctly, the answer is yes. But why opt for monthly interest if the money remains inaccessible for the duration? The AER % will be the same on monthly and annual interest.

refluxer

Daliah said:

You presume correctly, the answer is yes. But why opt for monthly interest if the money remains inaccessible for the duration? The AER % will be the same on monthly and annual interest.

Yes, you're right. I guess, for some, spreading the interest evenly throughout the duration of the fixed term by taking it monthly might be more desirable than receiving it in a lump sum in any one tax year, plus there are those who also like to see that money grow... not that that amounts to much these days with the current interest rates, I'll grant you ! 

I'm still relatively new to Fixed Rate accounts so just proceeding with caution and sussing out the pros and cons really, however small

wmb194

In my experience that would be a very unusual situation. Normally when you opt for monthly interest* it has to be paid out to another account.

Edit: *with a fixed rate savings bond

masonic

HMRC treats interest as having been paid when it becomes accessible. Some providers including the case where you could have opted for it to be paid to another account as the interest becoming accessible. If an account requires interest to be compounded in the fixed term account and pays it monthly (or even annually) it would only be treated as received in the tax year the account matures. A recent example of this would be Zopa's fixed term accounts, where interest is credited to the account monthly. They do make the tax position clear, stating "It’s important to note that any interest you earn on your Fixed Term Savings account is only liable to be taxed in the financial year that your account matures". This sort of thing can catch some people out as they might take out a 5 year fix and be liable for all 5 years interest in a single tax year. Ultimately though, you are hostage to what the provider declares, and they could declare to HMRC that the interest was received when it was added to the account, or at maturity, depending on their own interpretation of the tax rules.

See for example this HMRC Q&A: https://community.hmrc.gov.uk/customerforums/sa/8f101a1d-e6f5-ea11-b5d9-00155d974a89

refluxer

wmb194 said:

In my experience that would be a very unusual situation. Normally when you opt for monthly interest* it has to be paid out to another account.

Edit: *with a fixed rate savings bond

I don't know what the norm is, but I've had a number of Fixed Rate savings accounts with Ford Money where there are options to add monthly interest to the balance in the same Fixed Rate account or pay it out to either a different Ford Money account or your nominated bank account.

refluxer

masonic said:

HMRC treats interest as having been paid when it becomes accessible. Some providers including the case where you could have opted for it to be paid to another account as the interest becoming accessible. If an account requires interest to be compounded in the fixed term account and pays it monthly (or even annually) it would only be treated as received in the tax year the account matures. A recent example of this would be Zopa's fixed term accounts, where interest is credited to the account monthly. They do make the tax position clear, stating "It’s important to note that any interest you earn on your Fixed Term Savings account is only liable to be taxed in the financial year that your account matures". This sort of thing can catch some people out as they might take out a 5 year fix and be liable for all 5 years interest in a single tax year. Ultimately though, you are hostage to what the provider declares, and they could declare to HMRC that the interest was received when it was added to the account, or at maturity, depending on their own interpretation of the tax rules.

See for example this HMRC Q&A: https://community.hmrc.gov.uk/customerforums/sa/8f101a1d-e6f5-ea11-b5d9-00155d974a89

Thanks for the info. I've been through my T&Cs for the account in question and they don't state the tax implications of the monthly interest option, so I guess it'll be a question for the provider should this be an issue in the future.

masonic

refluxer said:

masonic said:

HMRC treats interest as having been paid when it becomes accessible. Some providers including the case where you could have opted for it to be paid to another account as the interest becoming accessible. If an account requires interest to be compounded in the fixed term account and pays it monthly (or even annually) it would only be treated as received in the tax year the account matures. A recent example of this would be Zopa's fixed term accounts, where interest is credited to the account monthly. They do make the tax position clear, stating "It’s important to note that any interest you earn on your Fixed Term Savings account is only liable to be taxed in the financial year that your account matures". This sort of thing can catch some people out as they might take out a 5 year fix and be liable for all 5 years interest in a single tax year. Ultimately though, you are hostage to what the provider declares, and they could declare to HMRC that the interest was received when it was added to the account, or at maturity, depending on their own interpretation of the tax rules.

See for example this HMRC Q&A: https://community.hmrc.gov.uk/customerforums/sa/8f101a1d-e6f5-ea11-b5d9-00155d974a89

Thanks for the info. I've been through my T&Cs for the account in question and they don't state the tax implications of the monthly interest option, so I guess it'll be a question for the provider should this be an issue in the future.

Request an annual interest summary at the end of each tax year if you are unsure what the provider will report to HMRC, or ask them now.

Ocelot

masonic said:

HMRC treats interest as having been paid when it becomes accessible. Some providers including the case where you could have opted for it to be paid to another account as the interest becoming accessible. If an account requires interest to be compounded in the fixed term account and pays it monthly (or even annually) it would only be treated as received in the tax year the account matures. A recent example of this would be Zopa's fixed term accounts, where interest is credited to the account monthly. They do make the tax position clear, stating "It’s important to note that any interest you earn on your Fixed Term Savings account is only liable to be taxed in the financial year that your account matures". This sort of thing can catch some people out as they might take out a 5 year fix and be liable for all 5 years interest in a single tax year. Ultimately though, you are hostage to what the provider declares, and they could declare to HMRC that the interest was received when it was added to the account, or at maturity, depending on their own interpretation of the tax rules.

See for example this HMRC Q&A: https://community.hmrc.gov.uk/customerforums/sa/8f101a1d-e6f5-ea11-b5d9-00155d974a89

I always thought that, but every year my long term fixed rate bonds report the amount I would have received (but which is inaccessible) yo HMRC and I have to pay tax on it in that year.

masonic

Ocelot said:

masonic said:

HMRC treats interest as having been paid when it becomes accessible. Some providers including the case where you could have opted for it to be paid to another account as the interest becoming accessible. If an account requires interest to be compounded in the fixed term account and pays it monthly (or even annually) it would only be treated as received in the tax year the account matures. A recent example of this would be Zopa's fixed term accounts, where interest is credited to the account monthly. They do make the tax position clear, stating "It’s important to note that any interest you earn on your Fixed Term Savings account is only liable to be taxed in the financial year that your account matures". This sort of thing can catch some people out as they might take out a 5 year fix and be liable for all 5 years interest in a single tax year. Ultimately though, you are hostage to what the provider declares, and they could declare to HMRC that the interest was received when it was added to the account, or at maturity, depending on their own interpretation of the tax rules.

See for example this HMRC Q&A: https://community.hmrc.gov.uk/customerforums/sa/8f101a1d-e6f5-ea11-b5d9-00155d974a89

I always thought that, but every year my long term fixed rate bonds report the amount I would have received (but which is inaccessible) yo HMRC and I have to pay tax on it in that year.

As mentioned, you are hostage to what the provider declares. I think some of them take the stance that if they offer the option to have interest paid away, then those who have it added to the fixed rate account have essentially voluntarily added it to the account and therefore have received it. Most people prefer their interest to be spread over more than one tax year, so providers are potentially interpreting the rules in the way they think is most favourable on the customer. I would be very wary of declaring interest to HMRC in a different way than the provider, even if technically correct it could end up creating unnecessary hassle.