Interest Question On Longer Term Fixed

Trigga7

Regarding a 5 year fixed savings account which I am looking to lock into, does the interest get paid at the end of the 5 years as one lump sum on maturity or will it get paid after every 12 month period?
This is important to me as the amount I have will fall below the £1000 yearly tax allowance if paid out yearly but will take me over if it's paid at the end of the 5 year term.
Also, is it the same across all the banks/bank accounts as a standard policy or does it vary from bank to bank.
I am hoping that someone could help clarify this for me.

ColdIron

They vary. Impossible to say without knowing which one you're talking about

Dazed_and_C0nfused

Trigga7 said:

Regarding a 5 year fixed savings account which I am looking to lock into, does the interest get paid at the end of the 5 years as one lump sum on maturity or will it get paid after every 12 month period?
This is important to me as the amount I have will fall below the £1000 yearly tax allowance if paid out yearly but will take me over if it's paid at the end of the 5 year term.
Also, is it the same across all the banks/bank accounts as a standard policy or does it vary from bank to bank.
I am hoping that someone could help clarify this for me.

Does the savings nil rate band (aka Personal Savings Allowance) even apply to you?

Have you factored in that the Personal Allowance and savings starter rate band have to be used before the savings nil rate band can be used?

What really matters is when the bank report the interest to HMRC.  If it's added to your account each year then it's likely to be reported as such and be taxable in that year.

Trigga7

I'm a bit confused as I honestly don't fully understand how all this works, but I've been trying to get me head around it...so my apologies if what I post sounds a bit vague, I don't mean to be

To clarify and to make it simple for me....

As an example, if I had £10,000 and put it in a 5% 5 year account that pays interest annually, would I be right in thinking the annual interest of £500 each year is paid into a linked or holding account and is reported to HMRC each year by the bank meaning no tax on interest earned....so effectively tax free?
This would probably be best for me right now if that is how it works

If I had the same amount in an account that pays the interest on maturity, the interest would be approx £2762.80(if I worked that out correctly) and would be reported to HMRC by the bank in the tax year of the maturity date on the 5th year and I would need to pay tax on this amount if I was in the basic rate income tax band.
But if I was in the starter rate then I wouldn't need to pay tax on this amount ?

Once again if I have got this totally wrong then I apologise to those of you who are currently rolling your eyes or grinding your teeth lol
Any help or guidance appreciated

Thank You

Millyonare

Don't be "ashamed" to ask.This thread demonstrates nicely what a mess the UK tax system has become. It is a huge drag on UK productivity and prosperity. People and firms waste billions of hours on needlessly convoluted tax formulas that add little or no value to the country's output. Uncertainty and fear of miscalculation reign supreme. It is an absurd mess.

Anyway, this article, from Which? magazine, is a good read. As you will see, even somebody on a simple £14k part-time salary and £5k of savings interest has to do no less than 5 calculations with 5 (moving target) % rates. It sucks.

Albermarle

As an example, if I had £10,000 and put it in a 5% 5 year account that pays interest annually, would I be right in thinking the annual interest of £500 each year is paid into a linked or holding account and is reported to HMRC each year by the bank meaning no tax on interest earned....so effectively tax free

It would depend on whether the provider has the facility to pay out the interest on an annual basis. AIUI, some have this possibility, and some do not.

If I had the same amount in an account that pays the interest on maturity, the interest would be approx £2762.80(if I worked that out correctly) and would be reported to HMRC by the bank in the tax year of the maturity date on the 5th year and I would need to pay tax on this amount if I was in the basic rate income tax band.
But if I was in the starter rate then I wouldn't need to pay tax on this amount ?

CORRECT

badger09

@Trigger7
Honestly, no body is rolling their eyes or grinding their teeth at your question.
This is one of the most unnecessarily convoluted areas of personal taxation & I doubt most HMRC staff understand it (I'm ex HMIT). Several Governments have promised to simplify taxation.
I won't live long enough to see it 

Ocelot

All of my fixed rate accounts get 'reported' to the HMRC each year, and I have to pay tax on them even though I don't get to see the interest until the end of the term.

Trigga7

Thank You very much for your help and replies....I appreciate it

Dazed_and_C0nfused

If I had the same amount in an account that pays the interest on maturity, the interest would be approx £2762.80(if I worked that out correctly) and would be reported to HMRC by the bank in the tax year of the maturity date on the 5th year and I would need to pay tax on this amount if I was in the basic rate income tax band.

But if I was in the starter rate then I wouldn't need to pay tax on this amount ?

It's actually a bit more complicated than that.

You could be a basic rate payer and have some savings starter rate left, for example if only income was say £14,000 earnings or pension and £2,762 interest then you will pay basic rate tax on some of the earnings/pension.  But will have £3,570 of the savings starter rate band available meaning no tax to pay on the interest as it will all be taxed at 0%.

But if you had £17,000 earnings or pension then you would have some starter rate band available but would have to pay some tax on the interest.

The first £570 would be taxed at 0% because of the savings starter rate and the next £1,000 would also be taxed at 0% because of the savings nil rate band (aka Personal Savings Allowance).  The final £1,192 would be taxed at 20%.

Although if the interest was reported to HMRC each year then you would never have £2,762 all in one tax year in the first place.

wmb194

Ocelot said:

All of my fixed rate accounts get 'reported' to the HMRC each year, and I have to pay tax on them even though I don't get to see the interest until the end of the term.

At the time of application were you given the *option* to have the interest paid away every month or year, though? If so, it's correct to report the interest annually.