Tax on savings account interest

EthicsGradient

km1500 said:

I think reporting is a bit of a red herring

Reporting does not mean it is taxable in that tax year

a (probably not very good) analogy is supposing you had some gold or an asset that was increasing in value each year. You could report the new value every tax year to HMRC but you would not actually need to pay CGT until you sold the asset

"Report" is the term HMRC uses, for how banks etc. inform them of the interest they've paid to people each year:

"Interest you do not need to include on a return

You should not report interest payable:
..."
https://www.gov.uk/guidance/bank-and-building-society-interest-returns
and it's notable that while they give a comprehensive list of when they shouldn't report interest, they do not list "multi-year bonds for which the interest is only accessible at maturity". And when you look at the information they send HMRC, there is not, as far as I can tell, any way of marking it as "interest that is only accessible at maturity".

So I think it's quite possible that providers report this interest each year to HMRC, even if we can't access it until maturity, and that HMRC will then treat is as taxable in each year. Even though their manual says they won't.

Sarahspangles

Maybe HMRC and banks are being pragmatic.

Say you pay into an Instant Access account in September during Tax Year One, and also buy a Bond that pays out on its 1st anniversary in September of Tax Year Two.  The bank reports the interest so far on both as at the end of March in Tax Year One, and again in Tax Year Two by which time the Bond has matured and you’ve moved the whole balance into your Instant Access account.  

Your notice of coding for Tax Year Three includes an adjustment to recover the tax in excess of the PSA you incurred in Tax Year One.  In Tax Year Three you’ve got the interest in the bank from both the Instant Access account and the Bond, so you don’t mind you’re paying a bit more tax, and you have also benefitted from the ‘levelling’ effect of the Bond interest being spread across a couple of years. You pay the tax on Year Two in Year Four.

I’m sure there are scenarios where there is detriment from this arrangement but that’s when you need to tell HMRC you’d rather it taxed ALL your bond income as falling in the year you can access it.  For example if you’ve timed a 5 year bond to mature in a year that your income falls so much that you have allowance to use over and above the PSA.  

Or am I completely misunderstanding the mechanism?!

EthicsGradient

Sarahspangles said:

Maybe HMRC and banks are being pragmatic.

Say you pay into an Instant Access account in September during Tax Year One, and also buy a Bond that pays out on its 1st anniversary in September of Tax Year Two.  The bank reports the interest so far on both as at the end of March in Tax Year One, and again in Tax Year Two by which time the Bond has matured and you’ve moved the whole balance into your Instant Access account.  

Your notice of coding for Tax Year Three includes an adjustment to recover the tax in excess of the PSA you incurred in Tax Year One.  In Tax Year Three you’ve got the interest in the bank from both the Instant Access account and the Bond, so you don’t mind you’re paying a bit more tax, and you have also benefitted from the ‘levelling’ effect of the Bond interest being spread across a couple of years. You pay the tax on Year Two in Year Four.

I’m sure there are scenarios where there is detriment from this arrangement but that’s when you need to tell HMRC you’d rather it taxed ALL your bond income as falling in the year you can access it.  For example if you’ve timed a 5 year bond to mature in a year that your income falls so much that you have allowance to use over and above the PSA.  

Or am I completely misunderstanding the mechanism?!

As an HMRC employee said to rl11 here: https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688

"You cannot opt for one choice or the other."
They went on to say "If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point. You are therefore bound by the conditions of the account", but terms and conditions do not specify when interest is reported to HMRC. We just have to badger our banks until they tell what they have reported/will report to HMRC.

RL11

Oh my gosh, this should be so simple;
I invest £10k in a 5 year bond @5%
I receive £500 per annum interest - for each of the next 5 tax years
I declare I have received £500 interest each tax year
That's it - so simple
Why the hell should I declare I received £2,500 in 2028? I didn't! I got £40 each month, as per what my account shows and what my annual certificate of interest shows.
What is the complication here?

RL11

It should have nothing whatsoever to do with the terms of the account! What are the tax rules? What the hell has access to the account assets got to do with taxation? Please advise if long term bonds are to be taxed annually or at maturity/closure. Simple question!

km1500

The interest on long term bonds *** where you have no access *** is taxed at maturity

Some banks report the interest annually, and as said, there seems to be no way of flagging that the interest is from a long term bond. For this reason HMRC may even include the interest on the pre-filled 'interest earned' available at the end of the tax year.

However, as I have said before, it is the individual's responsibility to ensure their tax return is right and *** should *** not include this in their tax return until maturity. However, I would imagine it is rarely if ever done, but that does not mean HMRC won't one day tighten up on it so if you want your interest tax annually make sure you go for monthly interest.

An alternative would be to invest in a long-term bond where you *** have access *** (probably with a penalty) in which case interest would be taxed annually - but I think these are quite rare.

Following this thread might help

https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688

eg

Posted 17 days ago by HMRC Admin 32 

Hi,

Much will depend on the type of account you have. If you have access to withdraw any of the funds at any time, then the interest will be taxable in the year in which it arises. If you have an account where you cannot access the funds until the end of a set term, then the interest would be taxable at the end of the fixed term, when you can access the funds.

Also of inteest migt be the savings and tax manual

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2400

"If an individual is unable to withdraw or have access to the interest when it is credited to their account, or has a specific product such as a bond, the interest will not arise and therefore they will not be taxable until they have access to the interest."

Goldenyears

I had some correspondence with HMRC three years ago when they wrongly assigned me 100% of the interest in a joint account.  That was fixed, but in doing so personal letters passed between us showing that there was perfect agreement between interest annually reported to me by providers and interest reported to HMRC by providers. These were 3-5 yr fixed term accounts, compounded interest, with no access before maturity. My tax code was adjusted accordingly for that year. Therefore I believe that so far HMRC are being pragmatic.

NS&I are the only providers who have declared to me that interest is only added and taxable at maturity.

wmb194

Goldenyears said:

I had some correspondence with HMRC three years ago when they wrongly assigned me 100% of the interest in a joint account.  That was fixed, but in doing so personal letters passed between us showing that there was perfect agreement between interest annually reported to me by providers and interest reported to HMRC by providers. These were 3-5 yr fixed term accounts, compounded interest, with no access before maturity. My tax code was adjusted accordingly for that year. Therefore I believe that so far HMRC are being pragmatic.

NS&I are the only providers who have declared to me that interest is only added and taxable at maturity.

Interesting. When you opened these bonds were you given the option to have the interest paid away? I doubt it's anything to do with HMRC being pragmatic, though, just that it doesn't know the terms of your bonds and just works on the basis of the annual returns from financial institutions.

Goldenyears

wmb194 said:

Interesting. When you opened these bonds were you given the option to have the interest paid away? I doubt it's anything to do with HMRC being pragmatic, though, just that it doesn't know the terms of your bonds and just works on the basis of the annual returns from financial institutions.

Yes they all had the option to have interest paid into another account which we declined.  Something we are reconsidering with new fixed term bonds.

Sarahspangles

Goldenyears said:

I had some correspondence with HMRC three years ago when they wrongly assigned me 100% of the interest in a joint account.  That was fixed, but in doing so personal letters passed between us showing that there was perfect agreement between interest annually reported to me by providers and interest reported to HMRC by providers. These were 3-5 yr fixed term accounts, compounded interest, with no access before maturity. My tax code was adjusted accordingly for that year. Therefore I believe that so far HMRC are being pragmatic.

NS&I are the only providers who have declared to me that interest is only added and taxable at maturity.

This is what I suspected - most banks and building societies aren’t distinguishing between instant access and fixed term/bond accounts so are simply reporting all interest yearly.  There may be some reason it’s in their interests to do so, such as HMRC fines if they fail to report interest - which they potentially might fall foul of due to misinterpreting HMRC rules?  

But for most customers it makes no material difference, as the tax is collected in arrears.