Tax on savings account interest

ro1892

Maybe it's referring to a penalty of the sort "we'll charge you 180 days interest if you want to access early" rather than the early access for bereavement type penalty. The guidance on the government website is not very clear.

aaj123

This gets me thinking that if you do (as per rules) pay tax on the interest accrued each year but later invoke early access with a penalty, can you claim then a refund on the tax you paid on the interest penalty?

RL11

I'm trying hard to get clarity from HMRC via a forum of theirs that I found: https://community.hmrc.gov.uk
It makes no sense to me that the interest is taxed at maturity and not when received.
I have a 5 year bond and receive monthly interest into the same account (I like to see the £40 going in each month!)
For tax year 2022/23 I will receive approx £200, for the following 4 years, I will receive approx £480 and in the final year of maturity approx £280.
I will be given a "Statement of Interest" by the provider, for each tax year, showing those amounts but according to HMRC guidance, I should not report this interest each year.
I will not get a statement after 5 years showing I got £2,400 in 2027 but that is what HMRC want me to report. I will then have to pay tax on £1,400 interest even though I haven't got close to me PSA in any of the previous 5 years!
I'm beginning to wish I hadn't seen the info on the MSE site about paying tax on the whole amount at the end
Obviously I would have declared what the provider said they had paid me each tax year, if I hadn't read about it being handled this other way.

ro1892

I'm guessing this is your thread on the HMRC forum @RL11? https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688

I found that whilst trying to make sense of the rules and will be watching with interest (no pun intended).

Based on what the "HMRC admin" said on your thread, it sounds like as your interest is paid into the bond itself (and therefore can't be accessed until maturity) then even though your interest is paid yearly it won't be taxed until maturity so will be taxed in one go meaning you go over the personal savings allowance. Whereas if you had the option to (and had elected to) have it paid into a separate account where you could access it straight away then it would be taxed yearly instead?

RL11

@ro1892 yes - that's me!
I get the interest monthly. I can have it paid to an external account and have switched to that, pending a clearer response from HMRC. I want the interest to compound though, so would rather it stayed in the bond account
I just don't understand why it's got to be complicated with establishing when interest "arises". It's so obviously my interest when I receive it, whatever account the interest goes into and whether I can access it

AmityNeon

aaj123 said:

ro1892 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.

Bereavement may fall under the set of exceptional circumstances in which providers will grant early access to an account, but it's not a financial penalty imposed by the provider.

ro1892 said:

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?

The bottom line is when a provider chooses to report interest to HMRC. If interest is reported to HMRC for a particular tax year, then the interest is considered to have 'arisen' during that tax year (practically speaking) and will be taxed accordingly. How it should work in theory (according to HMRC's rules, example scenarios and internal manuals) does not necessarily translate to what transpires in practice.

aaj123 said:

This gets me thinking that if you do (as per rules) pay tax on the interest accrued each year but later invoke early access with a penalty, can you claim then a refund on the tax you paid on the interest penalty?

Why would a refund be applicable? Financial penalties imposed by providers as a condition for early account access do not reduce the gross interest earned.

RL11 said:

It makes no sense to me that the interest is taxed at maturity and not when received.
I have a 5 year bond and receive monthly interest into the same account (I like to see the £40 going in each month!)
For tax year 2022/23 I will receive approx £200, for the following 4 years, I will receive approx £480 and in the final year of maturity approx £280.
I will be given a "Statement of Interest" by the provider, for each tax year, showing those amounts but according to HMRC guidance, I should not report this interest each year.
I will not get a statement after 5 years showing I got £2,400 in 2027 but that is what HMRC want me to report.

Interest simply being visible to you has no relation to when it arises. Strictly speaking, if you want to follow the rules to the letter, you should declare five years' worth of interest in 2027; if your provider reports interest to HMRC annually, you should provide corrections to HMRC. Alternatively, ask your provider what they do (when they report interest), and you can make a decision from there as to whether you should switch to having interest paid to an external account, if you can.

RL11

Interest simply being visible to you has no relation to when it arises.

Trying to establish when the interest "arises" is why it's so unnecessarily complicated. When I receive the interest into my account is when it should "arise" and then this lack of clarity would be removed.
If the interest only arises at maturity or account closure, then there should be no option to have interest paid monthly or annually.

AmityNeon

RL11 said:

AmityNeon said:

Interest simply being visible to you has no relation to when it arises.

Trying to establish when the interest "arises" is why it's so unnecessarily complicated. When I receive the interest into my account is when it should "arise" and then this lack of clarity would be removed.
If the interest only arises at maturity or account closure, then there should be no option to have interest paid monthly or annually.

It's probably why many providers just report interest to HMRC annually anyway (totalling the interest credits to your account), regardless of HMRC's complicated rules regarding when interest 'arises'. Either way, it's best to ask your provider what they do (practice), and not what the rules are (theory).

RL11

Either way, it's best to ask your provider what they do (practice), and not what the rules are (theory).

I have checked if they provide an annual Statement of Interest for tax purposes and they do, so had I not gone down this rabbit hole, I would have happily reported what was shown on that statement each year.
However, I am now concerned that if I do that, in 5 years time HMRC might come back and say I reported it incorrectly and I now have to pay tax because the total amount at maturity exceeds my PSA

AmityNeon

RL11 said:

Either way, it's best to ask your provider what they do (practice), and not what the rules are (theory).

I have checked if they provide an annual Statement of Interest for tax purposes and they do, so had I not gone down this rabbit hole, I would have happily reported what was shown on that statement each year.
However, I am now concerned that if I do that, in 5 years time HMRC might come back and say I reported it incorrectly and I now have to pay tax because the total amount at maturity exceeds my PSA

HMRC does not have access to your accounts (or its terms and conditions); if what your provider reports to HMRC matches the figures you declare to HMRC (if you even have to), how do you expect HMRC to discover anything that isn't reported or declared?