5% accounts - which would you go for?

Albermarle

Although the last poster on this thread agrees with HAppy Bagger ....
Interest Question On Longer Term Fixed — MoneySavingExpert Forum

isasmurf

happybagger said:

Interest paid to the bond on the anniversary date is part of that tax year's income. The interest becomes withdrawable when the bond matures but all the rolled-up interest is not considered earned in that one final tax year.

Not according to HMRC

Example 2

Sam entered into a five year fixed-term bond on 6 April 2017. The bond credits interest to Sam’s account annually on the 31 December. Sam can only gain access to both the annual interest and the principal in advance of 5 April 2022 if a penalty is paid for early access.

Since the terms and conditions of the bond allow Sam to draw on the funds, although with a penalty, the interest arises and is taxable each year as it is credited.

If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point.

happybagger

...which contradicts the paragraph above their example 1, which says:

Interest ‘arises’ when it is received or made available to the recipient. 

The question is what is "received or available". The above paragraph doesn't specify "withdrawable", while the example does

Certainly when I had a 5 year bond with Skipton BS the interest was added to the bond each anniversary and HMRC had it in my tax account each year.

cricidmuslibale

All this not quite being sure of the tax situation on Fixed Rate bonds can only serve to make Fixed Rate cash ISAs even more attractive, so it’s not surprising that they’re very popular at the moment despite their slightly lower interest rates in comparison to the equivalent non ISA fixes!

Millyonare

Albermarle said:

Millyonare said:

happybagger said:

This has been done to a death before now.

Interest 'accrues' daily. It is not taxable daily.
When it is added to your account annually, it has been "paid". Whether you can access it or not is not relevant. It forms part of your earnings in that tax year.

If it's a five year bond, and interest is added to the account annually, you will have interest over five tax years.

It may have been done to death, but it's clearly not been explained for every circumstance, and most people still don't fully understand the (ridiculous) tax rules for multiyear fixed savers.

For anyone still wondering, this Which? guide explains it well. The answer is, you have to phone each and every bank and ask when they will make your savings interest available and accessible (two different terms). Both events are taxable on the same year they happen.

1. Available?
2. Accessible?

As I understand this article, it is saying that if the fixed rate bond is not normally accessible ( which is the case for nearly all of them) and you do not take any payments from the bond to an outside account, then tax is calculated in the year that the bond matures.
This is the opposite of what HappyBagger says. 
So....

* Available = payable out (with penalty) (intra-term)
* Available = payable out (without penalty) (intra-term)
* Accessible = paid out (end of term)

happybagger

Looking at the updates to the HMRC Savings and Investments Manual, it looks like changes were made on 10 April 2019:

"Updated paragraph regarding when interest arises where no access to the interest."

although there is no information on what it said before the. This may have changed what was in there, leading to the confusion with the paragraph preceding the examples.

As I said in my case, it was listed each year, and it was definitely not accessible. Quite whether HMRC are aware whether each account is "accessible" or not, I don't know.

Black_Cat2

Lots of info in this thread but a little confused and require clarity. 

Been looking at Zopa's 2, 3, 4 and 5yr fixed term savings but unsure on the tax consequences.  Has anyone opened one of these?  I presume you will be taxed as a lump sum at the end of the term even though (unaccessible) interest is added monthly/annually?

Edit:  This is at the end of their 'additional information' - You only need to consider tax on your earnings in the financial year the fixed term ends. Tax treatment depends on individual circumstances and may be subject to change in future.

So £40000 on a 5yr/4.9% would mean approx £9800 in one tax year? 

adindas

Oasis1 said:

I've decided to put £10k into a 5yr fix as I don't think the 5% rate will get much higher at this point. Leaning towards Tandem as I like app-based banks. But there's a few other options too: https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

Wondering what people would go for, based on their experience with or knowledge of providers?

Straight answer. All of them as long as they are still covered by FSCS, I still could get it and still have money that I intend to save and it has not exceeded the tax allowance from saving AC.

refluxer

Black_Cat2 said:

Lots of info in this thread but a little confused and require clarity. 

Been looking at Zopa's 2, 3, 4 and 5yr fixed term savings but unsure on the tax consequences.  Has anyone opened one of these?  I presume you will be taxed as a lump sum at the end of the term even though (unaccessible) interest is added monthly/annually?

Edit:  This is at the end of their 'additional information' - You only need to consider tax on your earnings in the financial year the fixed term ends. Tax treatment depends on individual circumstances and may be subject to change in future.

So £40000 on a 5yr/4.9% would mean approx £9800 in one tax year? 

Yes, it would appear so - at least that is Zopa's take on it. They say a bit more on this in the 'tax' section in the Fixed Term T&Cs...

"Tax is only payable on earnings in the tax year your Fixed Term Savings account matures (HMRC describe this as when the interest 'arises' and is available to you)."

Black_Cat2

Thanks refluxer.  Bit of a shame really.  Like Zopa and would've gone with them if not for that part 🐈