When does interest earned in a fixed rate savings account count as income for tax purposes?

DiglisView

If I take out a 3-year fixed savings account which credits that account with interest annually, is the full, 3-year, compounded interest counted as income in the tax year in which the savings account matures, or are the annual interest payments credited to the savings account counted as income in each tax year? For example, if I invest £1000 into a 3-year fixed rate savings account today that pays 4% interest and credits interest to the savings account annually, £40 interest will be credited to the savings account on 29/09/23, £40 interest will be credited to it on 29/09/24 and £40 will be credited to it on 29/09/25, at which point the full balance of £4120 will be available for me to withdraw. For tax purposes, have I earned £40 in 2023/24 plus £40 in 2024/2025 plus £40 in 2025/2026? Or have I earned £120 in 2025/2026? Or does the answer vary by provider and product? Note that to keep the figures simple I've ignored any compounding of interest.

InvesterJones

When it gets credited to the account I believe. So there's a difference between savings that pay annually but can't be accessed until maturity, and something like NS&I where interest isn't paid until maturity.

striking through as other replies correct this.

macazon

The official answer is: Interest ‘arises’ when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw.
If you have a 5 year fixed rate savings account the pays yearly interest but the interest is paid into the account but the interest is not able to be withdrawn, then you would declare all of the interest when the account matures. Note: If the interest is able to be withdrawn by paying a penalty then the interest would have to be declared each year. 

DiglisView

Thank you for the replies. I'd always assumed that savings interest counted as income for tax purposes at the point it was credited to the savings account, even if it wasn't able to be withdrawn at that point. However, macazon's answer is borne out by the details of Zopa's 5-year, fixed term, 4.40% AER account (which prompted me to ask this question) which states:

"Interest is calculated daily and paid into your Fixed Term account once per month"

but also:

"You only need to consider tax on your earnings in the financial year the fixed term ends"

So, I've learned something new today and will have to adjust my financial spreadsheets accordingly - many thanks again.

Notepad_Phil

I partially agree with macazon (or maybe fully agree but am misunderstanding what they say).

My understanding from previous posters on MSE is that if an account offers the option of paying out monthly or annually, then the interest is counted in the tax year it is paid into the account, this happens even if you have chosen to keep all of the interest in the account to be paid out at the end of the multi-year fix.

This is certainly true for the multi-year fixed accounts I've had i.e. I've received the annual interest summaries in each tax year through the term even although I chose to keep the interest in the account.

Does the zopa account give you the option to pay out during the term? If it doesn't then it's like the national savings 3 year green(?) bond that they offered (still offer?) which doesn't give you the option and so all tax is payable at the end of the term.

macazon

My understanding come from HMRC internal manual, Savings and investments manual SAIM2440. Unfortunately, the manual does not give very good range of examples. I take it that if you cannot withdraw the interest until maturity (with penalty or not) then the interest should be reported when the bond matures. If you were given an option to pay the interest out of the account when you signed up for the account what matters is what you selected not what you could have selected.

km1500

If that is exactly right - it is the availability of the interest rather than the crediting of the interest that counts

coyrls

In practice, I think it depends on when the provider reports the interest to HMRC.  As Notepad_Phil suggests, where an annual interest summary is provided for tax purposes, then you should report that figure, even if the interest has been credited to the account and not paid to an external account.

xylophone

This article may be relevant.

https://www.telegraph.co.uk/money/ask-a-money-expert/when-does-the-interest-on-my-fixed-rate-bond-contribute-to-my-pe/#:~:text=According to HMRC, it does,as not all permit access.

Note the HMRC statement using the example of the NS&I bond.

However, if you had a bond that permitted you to draw on your savings during the term, it would contribute towards your PSA each year. This would apply even if the bond charged an access penalty.

For example, NS&I’s Guaranteed Growth three-year bonds pay the 4pc interest annually. Savers cannot access their money unless they surrender 90 days interest. The interest earned each year would contribute to their PSA as it is technically available. 

An HMRC spokesman explained: “The existence of an interest penalty does not mean that the saver is not free to draw on their savings.”

A basic rate taxpayer who put the maximum £10,000 into NS&I’s three-year bond will earn £400 in year one, £416 in year two and £432 in year three. Each year, these returns would contribute to the PSA.

DiglisView

Notepad_Phil said:

I partially agree with macazon (or maybe fully agree but am misunderstanding what they say).

My understanding from previous posters on MSE is that if an account offers the option of paying out monthly or annually, then the interest is counted in the tax year it is paid into the account, this happens even if you have chosen to keep all of the interest in the account to be paid out at the end of the multi-year fix.

This is certainly true for the multi-year fixed accounts I've had i.e. I've received the annual interest summaries in each tax year through the term even although I chose to keep the interest in the account.

Does the zopa account give you the option to pay out during the term? If it doesn't then it's like the national savings 3 year green(?) bond that they offered (still offer?) which doesn't give you the option and so all tax is payable at the end of the term.

The Zopa account does not give you the option to pay out during the term. The details state:

"No early withdrawals, not even for a fee. As soon as you’ve paid in the minimum amount you cannot access your money until the fixed term ends."

This statement, along with the earlier one I quoted ("You only need to consider tax on your earnings in the financial year the fixed term ends"), ties in again with the fact stated by several posters in this thread, i.e. the interest becomes income for tax purposes at the point it's able to be withdrawn (even with penalties) and not at the point it's credited to the account. The Zopa example account does not allow withdrawals under any circumstances and so the interest becomes income for tax purposes at the completion of its term.

Many thanks to all who contributed.

Notepad_Phil

Hmm, I've tried looking through the forums but can't find the thread that discussed this.

I guess the issue maybe boils down to the text in SAIM2400 (linked to from SAIM2440) which would seem to indicate that interest added is liable to tax in the tax year it is added, regardless of whether a person had an immediate right to the income:

"Interest arising. The tax charge under ITTOIA05/S370 is on the full amount of the interest arising in the tax year. The word ‘arising’ has been the subject of a number of tax cases. It includes received and also credited to a bank account (Parkside Leasing v Smith (1984) 58TC282). It has a wider meaning than this. In Dunmore v McGowan (1978) (52TC307) it was held to include the ‘swelling of a person’s assets’ even where the person had no immediate right to the income"

But that would seem to contradict SAIM2440 which does say "Interest ‘arises’ when it is received or made available to the recipient. Interest has been made available if it is credited to an account on which the account holder is free to draw.". Though I have just noticed that this talks about interest "received or made available" but then only defines the "made available" and it's to that which the "free to draw" is tagged.

I just wish the examples were a lot more clearer, but to be safe if anyone is likely to get hit by multiple years of interest being made liable in the maturing year then they should opt to get the interest paid out monthly or annually.