Fixed Rate Bond - PSA Implications

Mixablemixer23

Hi

I opened a 1 year fixed rate bond in May 2022 (at a poor interest rate - 22/23 tax year) and the interest was paid monthly on that bond to the same account (i.e. I could not access the interest or capital until maturity).

The bond has recently matured (23/24 tax year) and I can't find guidance from HMRC which clarifies whether the entirety of the interest that has become available to me in this tax year maturity (c. £200) would contribute towards the PSA threshold for this tax year or alternatively just the monthly interest that was added to the bond in the current tax year, the difference is c. £180. 

Does anyone know the answer? Any guidance from HMRC which clarifies this? 

wmb194

Mixablemixer23 said:

Hi

I opened a 1 year fixed rate bond in May 2022 (at a poor interest rate - 22/23 tax year) and the interest was paid monthly on that bond to the same account (i.e. I could not access the interest or capital until maturity).

The bond has recently matured (23/24 tax year) and I can't find guidance from HMRC which clarifies whether the entirety of the interest that has become available to me in this tax year maturity (c. £200) would contribute towards the PSA threshold for this tax year or alternatively just the monthly interest that was added to the bond in the current tax year, the difference is c. £180. 

Does anyone know the answer? Any guidance from HMRC which clarifies this? 

When you opened the bond were you given the option to have the interest paid away? If so, it will count in the tax year when it arose i.e. credited to your account as it actually was available but you just chose not to withdraw it.

Mixablemixer23

wmb194 said:

Mixablemixer23 said:

Hi

I opened a 1 year fixed rate bond in May 2022 (at a poor interest rate - 22/23 tax year) and the interest was paid monthly on that bond to the same account (i.e. I could not access the interest or capital until maturity).

The bond has recently matured (23/24 tax year) and I can't find guidance from HMRC which clarifies whether the entirety of the interest that has become available to me in this tax year maturity (c. £200) would contribute towards the PSA threshold for this tax year or alternatively just the monthly interest that was added to the bond in the current tax year, the difference is c. £180. 

Does anyone know the answer? Any guidance from HMRC which clarifies this? 

When you opened the bond were you given the option to have the interest paid away? If so, it will count in the tax year when it arose i.e. credited to your account as it actually was available but you just chose not to withdraw it.

The option was available to have the interest paid to the same account as the bond or another account (e.g. current account)

wmb194

Mixablemixer23 said:

wmb194 said:

Mixablemixer23 said:

Hi

I opened a 1 year fixed rate bond in May 2022 (at a poor interest rate - 22/23 tax year) and the interest was paid monthly on that bond to the same account (i.e. I could not access the interest or capital until maturity).

The bond has recently matured (23/24 tax year) and I can't find guidance from HMRC which clarifies whether the entirety of the interest that has become available to me in this tax year maturity (c. £200) would contribute towards the PSA threshold for this tax year or alternatively just the monthly interest that was added to the bond in the current tax year, the difference is c. £180. 

Does anyone know the answer? Any guidance from HMRC which clarifies this? 

When you opened the bond were you given the option to have the interest paid away? If so, it will count in the tax year when it arose i.e. credited to your account as it actually was available but you just chose not to withdraw it.

The option was available to have the interest paid to the same account as the bond or another account (e.g. current account)

Right, so it was available and the interest will therefore count towards the tax years in which it was paid.

Mixablemixer23

Once the interest was paid to the same account as the bond, it couldn't be withdrawn if that makes sense so technically wasn't available to me at the time (albeit would have been if I chose at the outset to have it paid to my current account) 

Dazed_and_C0nfused

At the end of the day it will be taxable income of the tax year the interest payer reports it as taxable to HMRC.

If interest was credited to your account each month then I would work on the assumption that the interest is going to be taxed in the tax year it was credited, so the majority will be income of 2022-23.

wmb194

Mixablemixer23 said:

Once the interest was paid to the same account as the bond, it couldn't be withdrawn if that makes sense so technically wasn't available to me at the time (albeit would have been if I chose at the outset to have it paid to my current account) 

But at the outset it was available, you chose not to make it so. 

EthicsGradient

But from this HMRC answer, I would say that it is when the account matures that matters, even if you chose that form of account over one which made the money available:
"When I created the time deposit, I have the option to pay it out annnually to my other bank account (therefore it's obviously available), or to credit it to the time deposit account itself for compounding (and in this case the interest is only available for withdrawal at maturity) Given the 2 option, I chose the interest credited to fixed deposit for compounding. Since I have made the choice at the beginning, it cannot be changed or reversed afterwards. In this case, the interest has been credited monthly to my fixed deposit account (although I cannot withdraw it). Shall I report the interest credited in each tax year, or consider it as "unavailable" and report it in lump sum at maturity?"
HMRC answer:
"Bank interest that is paid to you each year into your account, which you can access, is taxable in the year that it arises.  

Where the interest is held in the account, until the account matures, only then will the total sum of interest arising over the whole term, be taxable in the tax year it is paid."
Which tax year to declare interest for multi-year fixed deposit - Community Forum - GOV.UK (hmrc.gov.uk)

RG2015

Dazed_and_C0nfused said:

At the end of the day it will be taxable income of the tax year the interest payer reports it as taxable to HMRC.

If interest was credited to your account each month then I would work on the assumption that the interest is going to be taxed in the tax year it was credited, so the majority will be income of 2022-23.

Does this mean that it is the interest payer, rather than HMRC effectively decide the applicable tax year?

It is rather unsatisfactory and concerning that even a “tax expert” like yourself can only recommend making an assumption.

I also recall seeing contradictory answers on the HMRC helpline from their own agents. There was a post from @EthicsGradient on this some while back.

m_c_s

HMRC - 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.

HMRC - By having the interest paid into another account this means that you can access it to allow a withdrawal and as such would be taxed on an annual basis. For keeping it in the bond, whilst it may be applied annually, you cannot actually access the funds until the fixed term is finished. If you then choose to close the bond early, this is also seen as being able to access the fund and the interest and you would therefore need to declare the interest in that tax year.

https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688#:~:text=If%20you%20have%20access%20to,you%20can%20access%20the%20funds.

m_c_s

Also 

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