Tax on fixed term savings

Tom02

Hi
Do I need to pay tax on the interest earned from a two (or more) year fixed-term account if the total interest paid at the end of the term exceeds £1000, considering that the first £1000 interest earned in a one-year fixed-term account is tax-free?

km1500

Depends on the T and C of the bond.

If the terms and conditions of your bond allow you 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 your bond do not allow access until maturity, the interest would arise and be taxed at that point (ie maturity)

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440

Albermarle

km1500 said:

Depends on the T and C of the bond.

If the terms and conditions of your bond allow you 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 your bond do not allow access until maturity, the interest would arise and be taxed at that point (ie maturity)

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440

From other threads on the subject it seems a bit less clear cut than that.
Firstly with a non ISA fixed term savings account, you usually have a couple of options.
One is to have the interest paid yearly out of the account if that is an option.( maybe monthly even ) . In which case clearly the provider will report the interest payments to HMRC when they are  paid out. 
Second option is to leave it all there for the whole term, nearly all fixed term bonds will not allow any withdrawal at all, with or without a penalty. ( a couple do ) 
There seems to be some grey area, where if the interest is credited to the account yearly, it will be reported to HMRC then, even though there is no possibility to actually withdraw it. It seems most providers do this, but it is not 100% clear that they all do AFAIK.
There are a few accounts that will only credit interest at the end of the fixed term, and in this case the whole of the interest will fall into that tax year.


 

km1500

The link above in the HMRC tax manual states that if you cannot withdraw from the bond then total interest must be used in the tax year of maturity, 

So if you have a 5 yr bond that you cannot touch, and 5 lots of annual interest are added, then all the interest is taxed in yr 5.

It may well be reported to HMRC annually, but that does not change the tax situation.

Dave_5150

Short answer is that it depends on your circumstances.

If you are a basic rate tax payer earning over the personal allowance + the starting rate for savings (£17,570 total) then you pay tax on interest over £1,000 in the year it can be accessed.

You can read more here: https://www.gov.uk/apply-tax-free-interest-on-savings

GeoffTF

I have been told by a tax adviser that even if you do not have access to the money, you can pay tax whenever the money is paid into your account or at maturity. I have always paid year by year on many accounts and have never had an issue raised by HMRC.

Dave_5150

GeoffTF said:

I have been told by a tax adviser that even if you do not have access to the money, you can pay tax whenever the money is paid into your account or at maturity. I have always paid year by year on many accounts and have never had an issue raised by HMRC.

The usual approach is for HMRC to change your tax code to recover the tax owed. People earning over £10k of interest in a year complete a self assessment instead. 

km1500

GeoffTF said:

I have been told by a tax adviser that even if you do not have access to the money, you can pay tax whenever the money is paid into your account or at maturity. I have always paid year by year on many accounts and have never had an issue raised by HMRC.

Me too - I agree. But whereas that may have worked in the past, it is incorrect and may not work in the future.

GeoffTF

km1500 said:

GeoffTF said:

I have been told by a tax adviser that even if you do not have access to the money, you can pay tax whenever the money is paid into your account or at maturity. I have always paid year by year on many accounts and have never had an issue raised by HMRC.

Me too - I agree. But whereas that may have worked in the past, it is incorrect and may not work in the future.

Whether or not it is correct depends on the legislation, not on the internal manual. I have been paying year by year and HMRC has accepted my money. I do not expect to be asked to pay again. I raised this matter with a (company rather than personal) accountant friend. His reply was "you and everybody else". Nonetheless, if you want to defer payment until maturity, you can do so provided that you did not have prior access to the money.

km1500

An individuals tax liability is always calculated using the 'arising basis'. There are very few exceptions to this in the area of remittance. What this means is that income is taxable in the year in which it arises. In the case of GGB's (fixed rate bonds) this would be the date the bonds mature, where you are unable to access the bonds for the whole term, until maturity. If you are able to access the bonds, then the interest would be taxable each tax year, in the year it arises.

Obviously feel free to do.it any way you wish, but I was answering on the basis of tax law as implemented by HMRC. 

I cannot accept your implication that the HMRC tax manual is not aligned with legislation.