Multi year fixed bond, interest tax allowance question

mcfly998

Many apologies for a question that I'm sure has been asked before.  But hopefully it's a quick answer for someone in the know.

If I open a 2 year fixed interest bond, where the interest is paid annually back into the 2 year bond account (so none of the interest is available to me until the end of the second year).  And I earn £1000 per year in interest (basic rate taxpayer).  So over the 2 year term I will earn a total of £2000 interest.  Would I have to pay tax on £1000 of interest at the end of the second year as this is when all the interest is actually available to me.  Or would it all be tax free as it was classed as earning £1000 per year?  

Thanks for any insights.

Bigwheels1111

If the interest is paid each year then you have earned that interest, Does not matter where it went.

So 1k a year is free for under 40k earners.

NS&I, have a 3 year bond that pays at the end and you would pay more tax as it all comes in one go.

When I take out a fixed rate i want interest paid annually.

Into or out of does not matter.

RobfromCornwall

Bigwheels1111 said:

If the interest is paid each year then you have earned that interest, Does not matter where it went.

So 1k a year is free for under 40k earners.

NS&I, have a 3 year bond that pays at the end and you would pay more tax as it all comes in one go.

When I take out a fixed rate i want interest paid annually.

Into or out of does not matter.

Yes, although just to clarify, the basic rate goes up to £50k (£50,270 to be precise).

mcfly998

Many thanks for your timely and informative replies :-)

Dazed_and_C0nfused

If the interest is paid into your account then normally it would be taxable in that year.

It's not tax free in the sense it's ignored though, it is still taxable income and counts when establishing if you are a higher rate payer or liable to HICBC.

But if not you will find it is £1,000 that gets taxed at 0%.

masonic

It depends. Some providers, such as Zopa, show interest accumulating monthly, but declare it to HMRC as having been received when the account matures. Most providers declare it in the tax year it is credited to the account. If interest is paid outside of the account, it will always be declared in the tax year it is received. It is worth clarifying if it will make a difference, as it looks like it will in this case. HMRC's official stance is that interest should be considered paid when it becomes accessible, but providers seem to do as they wish.

If you name the provider, someone might be able to tell you from previous experience.

RobfromCornwall

Dazed_and_C0nfused said:

If the interest is paid into your account then normally it would be taxable in that year.

It's not tax free in the sense it's ignored though, it is still taxable income and counts when establishing if you are a higher rate payer or liable to HICBC.

But if not you will find it is £1,000 that gets taxed at 0%.

Hang on, if you are on a salary of £49k a year and year £2k a year in interest, does this mean you become a higher rate tax payer...?

Dazed_and_C0nfused

For the purposes of establishing your saving nil rate band yes.

Assuming by salary you mean taxable pay (P60 amount) and no extended basic rate created by GIft Aid or relief at source pension contributions then the savings nil rate band would only be £500 in that scenario.

So £36,430 of your basic rate band (plus all the Personal Allowance) would be used by the earnings and the interest would be taxed,

£500 x 0% (savings nil rate)
£1,270 x 20% (savings basic rate)
£230 x 40% (savings higher rate)

Total tax on savings = £346

Particularly bad news if you been in receipt of Marriage Allowance as you would lose that as well.

eskbanker

RobfromCornwall said:

Dazed_and_C0nfused said:

If the interest is paid into your account then normally it would be taxable in that year.

It's not tax free in the sense it's ignored though, it is still taxable income and counts when establishing if you are a higher rate payer or liable to HICBC.

But if not you will find it is £1,000 that gets taxed at 0%.

Hang on, if you are on a salary of £49k a year and year £2k a year in interest, does this mean you become a higher rate tax payer...?

Yes, that's exactly the sort of edge case that makes it important to understand the difference between "tax-free" and "taxable at 0%", savings interest (within the personal savings allowance) being the latter but often loosely referred to as the former....

km1500

If the £2000 interest is only ***available*** in year 2 (even if £1000 is added to your ongoing balance in year 1) then the total  £2000 will be counted as interest received in year 2 and zero in year 1

masonic

km1500 said:

If the £2000 interest is only ***available*** in year 2 (even if £1000 is added to your ongoing balance in year 1) then the total  £2000 will be counted as interest received in year 2 and zero in year 1

That is how HMRC intends it to work, but savings institutions rarely report it all in year 2 (or rather year 3 for a 2 year fix not taken out at the beginning of a tax year}.