Fixed term accounts, Monthly, Annually or at Maturity

Worried_of_wakefield

My wife, who does not work nor pays income tax until state pension kick in ( 8yrs time) is planning to open a couple of fixed term accounts, probably 5yr and keeping beneath the FSCS protection limit say £55k in each

Am I correct in thinking that interest paid ( say 5.8%) at maturity would at that final 5th year exceed her personal tax allowance of say £12.5k?

If thats how it works, why do some banks offer these options and some dont also is it detrimental to the final interest total

I assume then we should choose the annual option, this correct? 

Albermarle

Someone with no income can earn £18750 in interest before paying any tax.
Tax-free savings: check if you're eligible - Money Saving Expert

Worried_of_wakefield

Didn't know that Albermarle, thanks, however given that 2 x 55k 5yr accounts paid at maturity will in year 5 exceed £18750, so back to my OP, should she go for the annual option and whats the reason for it

Doctor_Who

Am I correct in thinking that interest paid ( say 5.8%) at maturity would at that final 5th year exceed her personal tax allowance of say £12.5k?

£110K earning 5.8% will give interest of ~£6300 per year, so over £30K if paid at maturity from a 5 year fixed account. If no other earnings/interest in that year then anything over ~£18570 (PA may have increased by then) will be taxed at 20%. Makes a lot more sense to get the interest paid away monthly or annually and use the personal allowance each tax year.

Worried_of_wakefield

Doctor_Who said:

Am I correct in thinking that interest paid ( say 5.8%) at maturity would at that final 5th year exceed her personal tax allowance of say £12.5k?

£110K earning 5.8% will give interest of ~£6300 per year, so over £30K if paid at maturity from a 5 year fixed account. If no other earnings/interest in that year then anything over ~£18570 (PA may have increased by then) will be taxed at 20%. Makes a lot more sense to get the interest paid away monthly or annually and use the personal allowance each tax year.

So by taking the interest away annually I would loose out on the compounding?

Doctor_Who

Worried_of_wakefield said:

Doctor_Who said:

Am I correct in thinking that interest paid ( say 5.8%) at maturity would at that final 5th year exceed her personal tax allowance of say £12.5k?

£110K earning 5.8% will give interest of ~£6300 per year, so over £30K if paid at maturity from a 5 year fixed account. If no other earnings/interest in that year then anything over ~£18570 (PA may have increased by then) will be taxed at 20%. Makes a lot more sense to get the interest paid away monthly or annually and use the personal allowance each tax year.

So by taking the interest away annually I would loose out on the compounding?

Yes, but you could put the paid away interest into another account earning interest, and there would be zero tax to pay since the yearly interest is well within the personal allowance. I'd forgo the compounding to save ~£2500 tax!

EDIT: the tax due at maturity from compounding would be closer to £3.5K.

Albermarle

Worried_of_wakefield said:

Didn't know that Albermarle, thanks, however given that 2 x 55k 5yr accounts paid at maturity will in year 5 exceed £18750, so back to my OP, should she go for the annual option and whats the reason for it

There have been many threads on this issue and there is a bit of a grey area.
In theory if the interest is not available to withdraw until maturity , then it should be taxed on maturity.
However if the provider adds on the interest annually, and reports that to HMRC annually then it will be taxed annually, even if it is not available to withdraw. There have been conflicting messages from HMRC, and if you ask the savings provider call centre they do not seem to know.
The consensus seems to be if the interest is added annually, then it will be taxed annually, but I wouldn't bet my life on it.

EthicsGradient

Albermarle said:

Worried_of_wakefield said:

Didn't know that Albermarle, thanks, however given that 2 x 55k 5yr accounts paid at maturity will in year 5 exceed £18750, so back to my OP, should she go for the annual option and whats the reason for it

There have been many threads on this issue and there is a bit of a grey area.
In theory if the interest is not available to withdraw until maturity , then it should be taxed on maturity.
However if the provider adds on the interest annually, and reports that to HMRC annually then it will be taxed annually, even if it is not available to withdraw. There have been conflicting messages from HMRC, and if you ask the savings provider call centre they do not seem to know.
The consensus seems to be if the interest is added annually, then it will be taxed annually, but I wouldn't bet my life on it.

As an example of "they do not seem to know", I asked SmartSave if they report to HMRC the interest on multi-year fixed term accounts (from which the interest is not accessible until maturity, though they update the balance each year) annually or only at maturity, and their first reply was "we don't report interest to HMRC at all". I asked if they were really sure about that, linking to where HMRC says it's the law, and what the penalties are, and then they replied "we report it annually".

The method of reporting is described here: How to complete a Bank and Building Society Interest return - GOV.UK (www.gov.uk)
and that says interest credited should be reported each year. Since none of us can find a way that interest can be marked as "credited to the balance, but not available until maturity", we think HMRC will use that to calculate the interest each year. That's despite their operatives saying, in online forums, that it should be assessed only when accessible (which the Money Savings Expert guide says too). It seems HMRC has a system not fit for purpose.

Albermarle

 I asked SmartSave if they report to HMRC the interest on multi-year fixed term accounts (from which the interest is not accessible until maturity, though they update the balance each year) annually or only at maturity, and their first reply was "we don't report interest to HMRC at all"

What can you say .......

Bigwheels1111

I have several fixed rate bonds / accounts.

Fixed for 5 & 7 years.

Paid away annually.

This gives me a nice income.

Plus I can save any un needed funds.

I will  need to file a self assessment next year as will go over 10k Interest.

Very easy to do, other than the basics, name , address etc.

Its only 2 boxes, Income and interest.

20 minute job at worst.

Albermarle

Bigwheels1111 said:

I have several fixed rate bonds / accounts.

Fixed for 5 & 7 years.

Paid away annually.

This gives me a nice income.

Plus I can save any un needed funds.

I will  need to file a self assessment next year as will go over 10k Interest.

Very easy to do, other than the basics, name , address etc.

Its only 2 boxes, Income and interest.

20 minute job at worst.

The OP indicated that they would prefer that the interest stayed in the account for compounding.