Interest taxed at maturity unfair

RL11

With interest rates finally rising to a level that makes it worth putting cash into a savings account, I am staggered that MSE (Martin) have not got involved in asking HMRC to change their guidance, that says interest is declared at maturity and NOT according to the annual interest certificates that we receive. If you go for a 5 year fixed rate, that pays interest into the same account (to compound interest), you only need about £4k to end up having to pay tax on the interest! It is totally unfair that despite only getting approx £220 per year, each year (for 5 years), you get taxed on ALL the interest received after 5 years! It's also understandable that, as we receive annual interest certificates and the provider reports interest annually, that most people would not realise that tax is due on the total amount at maturity. At the very least it should be possible to carry forward, the annual £1k (or £500) allowance, so the amount at maturity on a 5 year fixed rate, has to exceed 5 years worth of allowance.

MattMattMattUK

RL11 said:

With interest rates finally rising to a level that makes it worth putting cash into a savings account, I am staggered that MSE (Martin) have not got involved in asking HMRC to change their guidance, that says interest is declared at maturity and NOT according to the annual interest certificates that we receive. If you go for a 5 year fixed rate, that pays interest into the same account (to compound interest), you only need about £4k to end up having to pay tax on the interest! It is totally unfair that despite only getting approx £220 per year, each year (for 5 years), you get taxed on ALL the interest received after 5 years! It's also understandable that, as we receive annual interest certificates and the provider reports interest annually, that most people would not realise that tax is due on the total amount at maturity. At the very least it should be possible to carry forward, the annual £1k (or £500) allowance, so the amount at maturity on a 5 year fixed rate, has to exceed 5 years worth of allowance.

For most fixed accounts whilst you nominally earn the interest annually, from a legal perspective you only earn it on maturity, if the fixed account is somehow ended early then no interest is paid for any of the years. If the account is not a no access account and you have access to the funds throughout the term then the interest is earned and taxable in each individual year. 

ANGLICANPAT

I  only realized today when reading something on the HMRC site  that this  seems to be the case . I thought  NS&I  were on their own in doing it this way  , wasnt aware it was across the board .  So  does this mean now , that  if you choose monthly interest ,  in the hope of  spreading your interest evenly over the year to stop spikes  ,  you HAVE to choose to  have   the interest paid out of the fixed rate bond every month ? 

boingy

What's really unfair is that you can take out a five year fixed rate account and before it matures the govt can change the taxation rules in any way they choose. The savings allowance could increase, decrease, be abolished or be replaced by something else completely. It has only existed in its current form for 7 years. Govts do like to fiddle with stuff like this.

Swipe

If the banks were made to report all interest to HMRC annually regardless of term, that would solve the problem. 

masonic

I'm only aware of one provider that strictly states in its T&Cs that it reports all interest as being received at maturity (Zopa). For all other providers, they provide an option to have interest paid away at least annually, which is sufficient to satisfy the requirement for interest to have arisen when it is credited, even where the pay away option wasn't chosen. 

The annual interest certificates will match the interest the savings provider has declared to HMRC, so that is how HMRC will treat it unless you challenge that.

It has been reported by others that they have received tax advice stating that they can choose how to declare interest that has been paid into a fixed term account, but personally (not willing to pay for tax advice) I would always make my declarations consistent with the savings provider's.

Dazed_and_C0nfused

RL11 said:

With interest rates finally rising to a level that makes it worth putting cash into a savings account, I am staggered that MSE (Martin) have not got involved in asking HMRC to change their guidance, that says interest is declared at maturity and NOT according to the annual interest certificates that we receive. If you go for a 5 year fixed rate, that pays interest into the same account (to compound interest), you only need about £4k to end up having to pay tax on the interest! It is totally unfair that despite only getting approx £220 per year, each year (for 5 years), you get taxed on ALL the interest received after 5 years! It's also understandable that, as we receive annual interest certificates and the provider reports interest annually, that most people would not realise that tax is due on the total amount at maturity. At the very least it should be possible to carry forward, the annual £1k (or £500) allowance, so the amount at maturity on a 5 year fixed rate, has to exceed 5 years worth of allowance.

I suspect the scenario that you have outlined doesn't actually happen very much.

If the provider is providing your with an annual certificate showing the interest has been credited to your account they are highly likely to be reporting it like that to HMRC as well.

I don't recollect any poster on here ever claiming that a bank or building society had reported it like that AND then reported the cumulative interest against the final tax year.

Have you checked what has been reported to HMRC each year by the provider?

masonic

ANGLICANPAT said:

I  only realized today when reading something on the HMRC site  that this  seems to be the case . I thought  NS&I  were on their own in doing it this way  , wasnt aware it was across the board .  So  does this mean now , that  if you choose monthly interest ,  in the hope of  spreading your interest evenly over the year to stop spikes  ,  you HAVE to choose to  have   the interest paid out of the fixed rate bond every month ? 

It's not across the board. NS&I may well be a second example of providers that declare all interest at maturity, but there are many others that do not.

Bigwheels1111

You could self report the interest each year could you not.

There has been a lot of talking about this on the forum.

Sorry cant find the posts.

badmemory

NS&I is the only account I have that doesn't declare to HMRC annually & frankly it is a pain.  I thought they had changed it to annually at the same time as the banks stopped taxing it - obviously I was wrong!

metrobus

I think Nationwide declares everything at the end of the period and not annually.