Tax on your savings - When to get an ISA

EthicsGradient

Notepad_Phil said:

TiVo_Lad said:

What @razord and @Notepad_Phil said.

You need to be careful with accounts that span multiple tax years because you can end up paying tax on the interest for a multi-year fix which you wouldn't pay if you fixed for a year and then refixed. The multi-year fix crystalises the taxable interest in one go (the maturity date) whereas multiple year-long fixes allow you to spread the interest over multiple tax years.

Though it would seem to appear (from my experience and from Google searches on other people's experience)  that even when you've left the interest to accrue in the account, most companies still report the interest on multiple-year fixed accounts every year (unless they've specifically stated otherwise) - even though at least some of the HMRC documentation would tend to indicate that they are wrong to do so.

If you want to completely avoid the possibility then assuming you have the option, you can pay the interest out of the account on a monthly or annual basis and know exactly when the interest is reported.

Indeed - I have a multi-year account with SmartSave, that I thought, when opening it, counted as an 'annual interest' one, from the Terms & Conditions. But then HMRC's online guidance seemed to say "if you can't withdraw the interest in any way, then it is all counted as income only on maturity". So I asked on the HMRC forums, and one of them replied that, no, what counts is when the interest is reported to them, and I can tell that from the yearly certificates.

So I checked online with SmartSave, and they have conflicting information ("Interest Paid: Annually", but the detailed info for that says "Interest is calculated daily, based on the amount of funds in your account, and added to your savings at the end of your fixed term"). I asked them to make sure to produce a tax certificate, as HMRC said that is definitive, and they replied they don't produce tax certificates, since they're never needed, but they will, on the anniversary of the account, add interest to the balance they show, and that is what will count for tax purposes, so it's yearly. I asked them to correct the detailed info, and they haven't bothered after a week - it's still wrong.

It'll probably be better for me if it's yearly, so I'm going to take a screenshot after the anniversaries, treat it as annually, and blame SmartSave if HMRC complains in 3 years' time.

Indout96

Thank you for your replies, sorry for the delay in replying playing nursemaid to an ill wife at the moment so not been on the site

Albermarle

EthicsGradient said:

Notepad_Phil said:

TiVo_Lad said:

What @razord and @Notepad_Phil said.

You need to be careful with accounts that span multiple tax years because you can end up paying tax on the interest for a multi-year fix which you wouldn't pay if you fixed for a year and then refixed. The multi-year fix crystalises the taxable interest in one go (the maturity date) whereas multiple year-long fixes allow you to spread the interest over multiple tax years.

Though it would seem to appear (from my experience and from Google searches on other people's experience)  that even when you've left the interest to accrue in the account, most companies still report the interest on multiple-year fixed accounts every year (unless they've specifically stated otherwise) - even though at least some of the HMRC documentation would tend to indicate that they are wrong to do so.

If you want to completely avoid the possibility then assuming you have the option, you can pay the interest out of the account on a monthly or annual basis and know exactly when the interest is reported.

Indeed - I have a multi-year account with SmartSave, that I thought, when opening it, counted as an 'annual interest' one, from the Terms & Conditions. But then HMRC's online guidance seemed to say "if you can't withdraw the interest in any way, then it is all counted as income only on maturity". So I asked on the HMRC forums, and one of them replied that, no, what counts is when the interest is reported to them, and I can tell that from the yearly certificates.

So I checked online with SmartSave, and they have conflicting information ("Interest Paid: Annually", but the detailed info for that says "Interest is calculated daily, based on the amount of funds in your account, and added to your savings at the end of your fixed term"). I asked them to make sure to produce a tax certificate, as HMRC said that is definitive, and they replied they don't produce tax certificates, since they're never needed, but they will, on the anniversary of the account, add interest to the balance they show, and that is what will count for tax purposes, so it's yearly. I asked them to correct the detailed info, and they haven't bothered after a week - it's still wrong.

It'll probably be better for me if it's yearly, so I'm going to take a screenshot after the anniversaries, treat it as annually, and blame SmartSave if HMRC complains in 3 years' time.

Other threads that discussed this subject, seem to come to a similar conclusion. In that most providers seem to report the interest yearly to HMRC, regardless of the length of the fixed term, and how the interest is paid. BUT this was less than 100% clear from many T's & C's, and it also seemed some providers may be just reporting the interest at the end of the fixed term ( ZOPA was mentioned I think). Confusingly the HMRC advice seems to be that in fact the latter way is the correct way ( unless the interest is paid out to a bank account each month/year) but most providers were reporting yearly anyway. A bit of a grey area....

phillw

eskbanker said:

The fact that tax may be payable if you exceed £1K of interest in non-ISA accounts doesn't in itself mean that moving to an ISA is the best response, you should always consider what gives the best net return, which may sometimes be taxable accounts....

With the added complexity that if the situation changes, then you can only feed £20,000 a year into an ISA. So you have to think long term as well. People who keep a large amount of money in cash are pretty risk averse, so it will be difficult for them to come to a conclusion that gives the best net return.

eskbanker

phillw said:

eskbanker said:

The fact that tax may be payable if you exceed £1K of interest in non-ISA accounts doesn't in itself mean that moving to an ISA is the best response, you should always consider what gives the best net return, which may sometimes be taxable accounts....

With the added complexity that if the situation changes, then you can only feed £20,000 a year into an ISA. So you have to think long term as well. People who keep a large amount of money in cash are pretty risk averse, so it will be difficult for them to come to a conclusion that gives the best net return.

You're right that there are a range of factors to consider, so thinking long term about ISA limits may be applicable too (although your scenario wouldn't seem to apply to the poster I was replying to), but the key point is that it isn't a simplistic case of believing ISA to be the obvious next step if getting close to using up the PSA.