Tax on savings account interest

RL11

Seems clear here:

https://savingschampion.co.uk/news/savings-news/beware-are-you-paying-tax-on-your-savings-again

cricidmuslibale

wmb194 said:

RL11 said:

km1500 said:

True, but it is your responsibility to then correct your tax affairs and notify HMRC that this interest reported is, in fact, not taxable in this tax year but upon maturity

I think this is the whole point being made in the thread. How would anyone know there is anything to correct? What government/hmrc legislation clearly states that you must declare the interest at maturity, if you do not have access to the interest that has already been credited, until the bond reaches maturity? I know it's the opinion of a Which reporter - who else?

If a bank gives you a Statement of Interest that shows you got £200 in 2021/22, you will have declared £200 for 2021/22 and so will the bank. You are not going to contact HMRC and tell them that you just read an article in Which that led you to believe the bank reported the wrong figures and you want 2021/22 changed to zero, to ignore anything the bank sends for the next 4 years and you'll give them the correct figure in 2027!

I cannot find it now but a link to it is sometimes posted on the forum; there was a court case about this. It could be that which set the precedent. The defendant claimed the interest was taxable annually as it was credited to the account and HMRC claimed it was taxable at maturity because, due to the terms of the account, it wasn't accessible during the term. The court sided with HMRC.

At present, with the interest rates on many multi-year fixed term non ISA accounts being 4% or above, it is very much in HMRC’s interest (pun intended) for fixed term accounts to be taxable at maturity rather than annually, whenever annual (or monthly) interest payments are not paid away into another account. This is because taxing these kinds of accounts at maturity will significantly increase the total savings tax take for HMRC as savers’ Personal Savings Allowances are clearly much more likely to be exceeded by the total amount of interest received throughout the lifetime of a multi-year account than any annual amount of interest credited to that account!

Consider, for example, £10,000 saved within a three year fixed rate bond paying 4.5% interest, which is approx. what the most competitive three year fixed term accounts are paying at the moment. This will give an annual interest return of £450 in the 1st year, £470.25 in the 2nd year and £491.41 in the 3rd year, all three interest amounts being less than the Personal Savings Allowances of both basic and higher rate taxpayers (£1000 and £500 respectively). If this three year bond is taxable annually, HMRC will not receive even a single penny in tax from these interest payments for any saver whose Personal Savings Allowance is fully unused before this bond is taken into account!

Now consider the same amount of £10,000 saved into a three year fixed rate bond again paying 4.5% interest but this time with all interest received taxable at maturity rather than annually. No tax would need to be paid to HMRC after the first two years of the bond’s lifespan clearly, but after the third and final year it most certainly would be for both basic and higher rate taxpayers, even if the respective Personal Savings Allowance was previously fully unused!

Total interest received: £450 + £470.25 + £491.41 = £1411.66

A basic rate taxpayer with an unused PSA would pay £1411.66 - £1000 = £411.66 x 20% = £82.33 in tax to HMRC.

A higher rate taxpayer with an unused PSA would pay £1411.66 - £500 = £911.66 x 40% = £364.66 in tax to HMRC.

So, it can be very clearly seen from the above that it is very much in HMRC’s interest (again pun intended) in terms of increasing the total tax take they receive from savings interest, for multi-year fixed term accounts to be taxed at maturity rather than annually whenever this is feasible!

RL11

Of course taxing interest at maturity is going to increase tax raised but this is simply not fair. The PSA was introduced in 2016 so that each tax year, an individual could receive £1,000 or £500 interest tax free. It's an annual allowance but if you only have a 5 year bond and have to pay tax on the total at maturity, you don't get any tax relief on 4 of those years. That cannot be right

jak22

HMRC aren't hoping to maximise tax collected on interest like that - they're just following rules and legislation. In the same way having an ISA is a way to reduce tax then - depending on individual circumstances - it's possible that it's better to avoid choosing a fixed bond where all the interest become available at maturity - that's our decision to make. I've no idea why this subject ends up with multi-page threads every few days repeating all the same discussion points.

eskbanker

jak22 said:

I've no idea why this subject ends up with multi-page threads every few days repeating all the same discussion points.

But as far as HMRC are concerned the only discussion points that count are on the last page....

EthicsGradient

jak22 said:

HMRC aren't hoping to maximise tax collected on interest like that - they're just following rules and legislation. In the same way having an ISA is a way to reduce tax then - depending on individual circumstances - it's possible that it's better to avoid choosing a fixed bond where all the interest become available at maturity - that's our decision to make. I've no idea why this subject ends up with multi-page threads every few days repeating all the same discussion points.

We've never found "legislation" (or had HMRC quote legislation) that is definitive about this. They have a handbook that seems to be clear about this, but I've now seen the same "HMRC admin" give contradictory replies on the subject on their forums - first contradicting the handbook, then agreeing with it. It ends up with multi-age threads because neither HMRC nor account providers give consistent replies on the topic, and their method of collecting information doesn't seem to allow them to follow the handbook method.

We're just trying to work out how to phrase questions to HMRC or providers to get unambiguous answers for the various questions - if their best people reply, that is (or, failing that, their most senior people, whose ruling will get taken as "correct").

RL11

EthicsGradient said:neither HMRC nor account providers give consistent replies on the topic

The providers that I've contacted say exactly the same thing - they submit a report of interest received/paid each tax year - whether it is credited to the same or an external account.
They also provide a Statement of Interest for the tax year that tallies with what they have submitted.
Any individual that has never looked into when interest "arises" will, of course, submit what their annual Statement of Interest shows.
It is only HMRC (on their Forum) that have confused things, by sometimes suggesting that somehow interest "arises" at the end of the term, if you can't access the already credited interest until then. It would make much more sense to state that interest only "arises" at the end of the term, if you get all of the interest credited at the end of the term.

HMRC - please read the thread - or at least last page - and adjust your manual and examples accordingly. Thanks

EthicsGradient

RL11 said:

EthicsGradient said:neither HMRC nor account providers give consistent replies on the topic

The providers that I've contacted say exactly the same thing - they submit a report of interest received/paid each tax year - whether it is credited to the same or an external account.
They also provide a Statement of Interest for the tax year that tallies with what they have submitted.
Any individual that has never looked into when interest "arises" will, of course, submit what their annual Statement of Interest shows.
It is only HMRC (on their Forum) that have confused things, by sometimes suggesting that somehow interest "arises" at the end of the term, if you can't access the already credited interest until then. It would make much more sense to state that interest only "arises" at the end of the term, if you get all of the interest credited at the end of the term.

HMRC - please read the thread - or at least last page - and adjust your manual and examples accordingly. Thanks

SmartSave, the provider of the one account I don't get interest paid externally to, are ambiguous on the same web page - I said this in another thread on the subject :

"As an example of SmartSave's ambiguity, if you log in and see the Account Overview page for the 3 year Fixed Rate Saver, it says "Interest Paid: Annually", but has an "i" information icon next to that, which expands to "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 decide which they mean, but they haven't bothered, after several months."

Elsewhere, they say they'll add it on each anniversary, so I suspect that'll be what they do. I'll find out in April. Then I'm going to ask them what they're doing about reporting to HMRC - I think it'll only be worth doing that when I know for sure how they show to me the amount in the account. They've also said they will not provide any Statement of Interest, since it hasn't been necessary, according to them, since interest started being paid gross. So the primary indication to me is the amount shown online.

Notepad_Phil

wmb194 said:

RL11 said:

km1500 said:

True, but it is your responsibility to then correct your tax affairs and notify HMRC that this interest reported is, in fact, not taxable in this tax year but upon maturity

I think this is the whole point being made in the thread. How would anyone know there is anything to correct? What government/hmrc legislation clearly states that you must declare the interest at maturity, if you do not have access to the interest that has already been credited, until the bond reaches maturity? I know it's the opinion of a Which reporter - who else?

If a bank gives you a Statement of Interest that shows you got £200 in 2021/22, you will have declared £200 for 2021/22 and so will the bank. You are not going to contact HMRC and tell them that you just read an article in Which that led you to believe the bank reported the wrong figures and you want 2021/22 changed to zero, to ignore anything the bank sends for the next 4 years and you'll give them the correct figure in 2027!

I cannot find it now but a link to it is sometimes posted on the forum; there was a court case about this. It could be that which set the precedent. The defendant claimed the interest was taxable annually as it was credited to the account and HMRC claimed it was taxable at maturity because, due to the terms of the account, it wasn't accessible during the term. The court sided with HMRC.

There is the Dunmore case (which is mentioned in the hmrc manual SAIM2400) - but unfortunately that is actually the other way around. That was a case where the interest was from an account that had been charged as security for a business guarantee and hence the interest could not be withdrawn due to that security. If the account hadn't been used as security then the interest could have been withdrawn and hence why the HMRC ruled that it was taxable per year whereas the defendant only wanted to pay the tax at maturity.

I think it all depends on the banks/building societies/hmrc definition of "If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point.".

If you open an account that allows you to pay the interest away, but you don't choose to take that option, then I would read that sentence as meaning that the interest is taxed as it arises. The account did allow access, I just chose not to. This might also include accounts where interest is paid out if the account would go across some monetary value if it was just added on.

The only accounts I can remember that stated that they would tax interest at maturity explicitly did not have any option to pay the interest away. Which would go along with the Dunmore case and why HMRC said it was taxable on an annual basis.

Paul_Croft

Hi.I have a joint account with Tesco which is being taken over by Barclays and we are intending opening a savings account for my wife only at another bank. My wife does not work, has no income, pension etc, and relies on my income only.( Which is a pension) If my wife opens a savings account, how much tax free interest is she allowed to earn and does she need to fill any form to confirm she is a non tax payer. I would appreciate if someone would genuinely clarify the correct details of how much interest she is allowed and whether a form like R85 is still required. 

Thank you.
Much appreciated.
Paul Croft