Tax on savings account interest

ro1892

If your savings interest takes you over your personal savings allowance and therefore you need to pay tax on savings interest, in the case of fixed term accounts where the interest is paid annually but not accessible until maturity (as it's paid directly into the account) am I right in thinking that the interest counts in the tax year based on the date you receive the interest into the account (rather than maturity of the account).

So for example if I open a 3 year fixed saver on - 15th May 2022 and interest is paid as follows (figures made up):
- 15th May 2023 (1yr after opening): £100
- 15th May 2024 (2yrs after opening):£101
- 15th May 2025 (3yrs, account matured, interest accessible): £102

The interest would be attributed to the tax year it was received so:
- tax year 2023/24: £100 interest received
- tax year 2024/25: £101 interest received 
- tax year 2025/26: £102 interest received 

 Rather than:
- tax year 2023/24: £0 interest received
- tax year 2024/25: £0 interest received 
- tax year 2025/26: £303 interest received

EthicsGradient

There are 3 timings to be considered: when the account shows you that interest has been added; when the account provider notifies HMRC that interest has been added; and when the account matures and the interest is available.

HMRC has written its guidance so that it assumes that interest will be taxable when the account matures, but they seem to be assuming that the provider won't tell them about the interest before then. I doubt that HMRC are organized enough to be able to know, and remember, that if a bank tells them about interest in 2023 and 2024, that they need to wait until 2025 to tax it (because HMRC won't keep lists of "this is a 2 year account, that is a 3 year account" etc.).

So it seems much more likely it's going to depend on when the account provider tells HMRC about the interest. Our problem is that we don't know what each provider's policy is. We get a new thread on this subject most days. It's the kind of thing that MSE, and Martin Lewis, really could help by publicly asking the account providers to make clear statements (or getting HMRC to say something definitive).

Does anyone know the best way of asking those who run MSE if they'll ask the question, on behalf of millions of savers?

Albermarle

Am I over the personal savings allowance? — MoneySavingExpert Forum

As you can see from this thread there are different opinions/a grey area,  as well explained in the previous post.

ro1892

Thanks for the replies. I hadn't realised it would be that much of a can of worms! If things stay the same I will be required to do self assessments those tax years and will need to make sure I declare the interest correctly so I don't get a penalty. At least I should have a good amount of time to look into this a bit more before the first self assessment is due!

Sounds like it would be safer in the future to open accounts that let you get interest paid to a different account as that feels a bit more concrete in terms of which tax year I received the interest (as mentioned in the linked thread).

aaj123

On the Halifax reward current account, if one opts the condition of £500 debit card transaction, does the £5 reward not count as taxable?

The reason I say this is that the product document says that if you opt for the 'Keeping £5000 all through the month' condition, then they pay the £5 as a net payment out of a gross of £6.25 reward. So are they implying that the £5 in the former case gets a different treatment from HMRC?

ro1892

aaj123 said:

On the Halifax reward current account, if one opts the condition of £500 debit card transaction, does the £5 reward not count as taxable?

The reason I say this is that the product document says that if you opt for the 'Keeping £5000 all through the month' condition, then they pay the £5 as a net payment out of a gross of £6.25 reward. So are they implying that the £5 in the former case gets a different treatment from HMRC?

According to this article: https://www.scotsman.com/lifestyle/money/smart-money-do-i-need-to-pay-tax-on-cashback-from-my-current-accounts-jenny-ross-3820793 it is taxable as it isn't classed as savings income and therefore isn't covered by the personal savings allowance. The article does mention that you could claim the £1.25 if your income is less than the personal allowance and you don't pay tax, but consequently you may need to pay additional tax on it if your in the higher/additional rate bands as the £6.25 has been taxed assuming you're a basic rate tax payer.

aaj123

ro1892 said:

aaj123 said:

On the Halifax reward current account, if one opts the condition of £500 debit card transaction, does the £5 reward not count as taxable?

The reason I say this is that the product document says that if you opt for the 'Keeping £5000 all through the month' condition, then they pay the £5 as a net payment out of a gross of £6.25 reward. So are they implying that the £5 in the former case gets a different treatment from HMRC?

According to this article: https://www.scotsman.com/lifestyle/money/smart-money-do-i-need-to-pay-tax-on-cashback-from-my-current-accounts-jenny-ross-3820793 it is taxable as it isn't classed as savings income and therefore isn't covered by the personal savings allowance. The article does mention that you could claim the £1.25 if your income is less than the personal allowance and you don't pay tax, but consequently you may need to pay additional tax on it if your in the higher/additional rate bands as the £6.25 has been taxed assuming you're a basic rate tax payer.

Yeah so I wonder why Halifax made the particular distinction of saying they give a gross reward of 6.25 and net it up to credit you £5 only when the condition you opted for was the 'keep £5K balance'. Versus just a plain £5 reward when you opted for the debit card spending condition. This is the exact wording:

For the £5 for £5,000 offer
If you choose to keep £5,000 or more in your account, the Monthly Reward will be paid 'net' after the deduction of income tax at the rate set by law (currently 20%). The gross value of the Monthly Reward before income tax is taken off is £6.25. If you're a higher rate tax payer, you may have to pay extra income tax on the Monthly Reward. If we have deducted more tax than you have to pay you may be able to claim it back from HMRC.

Further, what happens if the reward you opt for is one of those movie ticket / magazines one. Then would you still be taxable on the monetary value of those rewards?

I might be wrong but I suspect the treatment of the above scenario is different because linking a reward to maintenance of a certain balance inescapably makes it look like interest. Whereas getting the reward linked to just a spending condition makes it distinct from interest.

ro1892

aaj123 said:

ro1892 said:

aaj123 said:

On the Halifax reward current account, if one opts the condition of £500 debit card transaction, does the £5 reward not count as taxable?

The reason I say this is that the product document says that if you opt for the 'Keeping £5000 all through the month' condition, then they pay the £5 as a net payment out of a gross of £6.25 reward. So are they implying that the £5 in the former case gets a different treatment from HMRC?

According to this article: https://www.scotsman.com/lifestyle/money/smart-money-do-i-need-to-pay-tax-on-cashback-from-my-current-accounts-jenny-ross-3820793 it is taxable as it isn't classed as savings income and therefore isn't covered by the personal savings allowance. The article does mention that you could claim the £1.25 if your income is less than the personal allowance and you don't pay tax, but consequently you may need to pay additional tax on it if your in the higher/additional rate bands as the £6.25 has been taxed assuming you're a basic rate tax payer.

Yeah so I wonder why Halifax made the particular distinction of saying they give a gross reward of 6.25 and net it up to credit you £5 only when the condition you opted for was the 'keep £5K balance'. Versus just a plain £5 reward when you opted for the debit card spending condition. This is the exact wording:

For the £5 for £5,000 offer
If you choose to keep £5,000 or more in your account, the Monthly Reward will be paid 'net' after the deduction of income tax at the rate set by law (currently 20%). The gross value of the Monthly Reward before income tax is taken off is £6.25. If you're a higher rate tax payer, you may have to pay extra income tax on the Monthly Reward. If we have deducted more tax than you have to pay you may be able to claim it back from HMRC.

Further, what happens if the reward you opt for is one of those movie ticket / magazines one. Then would you still be taxable on the monetary value of those rewards?

I might be wrong but I suspect the treatment of the above scenario is different because linking a reward to maintenance of a certain balance inescapably makes it look like interest. Whereas getting the reward linked to just a spending condition makes it distinct from interest.

With the £5 for £500 debit card transaction I suspect it's classed as cashback on spending (which from what I've read in other places isn't taxable), but the £5 for £5000 is classed as "income" as opposed to cashback. Not 100% sure, but that's my theory and lines up with what you said in your last paragraph.

ro1892

Back to the original question and from looking at SAIM2440 and the examples it now seems more straightforward (assuming I'm not oversimplifying). For multi year fixed rate bonds, my understanding is:

Scenario 1

All interest paid at maturity: 

Any tax on the interest would be due in the tax year the bond matures and interest is added (no idea if this kind of bond even exists, all seem to pay monthly or yearly)

Scenario 2a

Interest paid yearly into the fixed rate bond and is not accessible (i.e. you can't even get to it with a penalty):

Even though interest is added yearly, because you are unable to access it any tax on the interest would be due in the tax year the bond matures

Scenario 2b

Interest paid yearly into the fixed rate bond and the bond (including interest) can be accessed (with a penalty): 

Any tax on the interest would be due in tax year the interest is paid. It doesn't matter whether you actually access it and take the penalty or not, it's the fact that the account allows access (albeit with penalty) which is the key factor

Scenario 3

Interest paid yearly into another account:

Any tax on the interest would be due in tax year the interest is paid

The only confusion now is with scenario 2a, where if the the bank reports to the interest as added in each tax year, then how does HMRC know that the T&C's of the account mean you can't access it until maturity and therefore tax is not due until maturity?

aaj123

Interest paid yearly into the fixed rate bond and the bond (including interest) can be accessed (with a penalty): 

Any tax on the interest would be due in tax year the interest is paid. It doesn't matter whether you actually access it and take the penalty or not, it's the fact that the account allows access (albeit with penalty) which is the key factor

Is this really as simple? How can the nature of the penalty not be of relevance? A penalty could be so stringent so as to make the access impractical in all but very specific scenarios. I doubt it can as black and white as access / no access. For example, many accounts offer full access in events like bereavement.

ro1892

aaj123 said:

Interest paid yearly into the fixed rate bond and the bond (including interest) can be accessed (with a penalty): 

Any tax on the interest would be due in tax year the interest is paid. It doesn't matter whether you actually access it and take the penalty or not, it's the fact that the account allows access (albeit with penalty) which is the key factor

Is this really as simple? How can the nature of the penalty not be of relevance? A penalty could be so stringent so as to make the access impractical in all but very specific scenarios. I doubt it can as black and white as access / no access. For example, many accounts offer full access in events like bereavement.

I agree, it does seem unfair but It's my interpretation of example 2 in the government guidance: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440 (and I could well be wrong).

It states:

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.

Paragraph 2 implies (to me) that as Sam can access the money by paying a penalty then this means interest is taxable in the year it is added to the account rather than at maturity.