Tax on 5 year fixed rate bonds

Bigwheels1111

intalex said:

Does anyone know of any bank (for any product) producing a certificate of interest for tax purposes that follows the "tax all at maturity" rule even though interest is credited (compounded) annually?

Not sure on this but I have 2 isa’s that are compounding the interest.
My Virgin ISA pay interest in July, it produced a statement.
I think most accounts provide a statement each year when interest has be paid, into, out off the account.

I deliberately opted for annual payouts.
I have a spreadsheet and kept a photocopy of that months bank statement.
As I’ve breached the 10k interest limit, I will need to files a self assessment.
But Anyone can sign up and enter their interest payments into the form.
To give HMRC the correct interest for the year.
That should solve many issues.

This is my ISA statement. Is this the type of statement you want.

EthicsGradient

35har1old said:

EthicsGradient said:

mh1910 said:

An update for anyone tracking this thread. I submitted my tax return and had it corrected by HMRC because their records showed a different total. They gave me the details over Webchat (very impressive service by the way) and it seems that several banks reported the annual interest on long term fixed rate bonds to HMRC. Worryingly, some who should have reported (because they are instant access) hadn't. So, even if you don't submit a return, you must check the total HMRC use to set your tax code as it's your legal obligation to get it right (I think).

So, my takeaway from this is that the best bet is to just match the HMRC number (they will provide this in advance of filling in your return) but add on any others they don't seem to have gathered.

The advice on this from HMRC on their forums is a mess, and the guidance doesn't have enough clear examples. In my opinion the banks should state, when you open the account or in Ts &Cs whether tax is reported and payable annually or at the end.

Also, make your lives easier by having the interest paid out to another account, if that's an option.  

While it's good to hear how this problem has worked out in practice for someone, it's quite worrying that it sounds like HMRC are going to use the misleading figures that their broken reporting system provides, rather than the correct figures (interest is taxable only when accessible) that HMRC have been saying, for some months now, must be used (and which they've even told people to correct previous years' returns to use).

I had come to the conclusion that they really had decided what taxpayers should say (as had MSE in its advice), and have been planning what to do with money from accounts that mature in next tax year accordingly. But if they're now going to use whatever the banks report to them, then that plan will cost me money.
**** HMRC.

When you first apply for a bond which gives you the options of adding the interest to the bond yearly or paying it away to a nominated account it does not matter which option you choose  it will be reported to HMRC yearly

But, up until now, what a bank reported to HMRC did not affect what your tax liability was, according to HMRC. They told us (and MSE says this too) that it's when you can access the interest that counts. HMRC told people that if their tax calculation had used that yearly amount, then they should ask for the previous years to be corrected, and then for all the interest to be declared in the final year, because that was when it would become available.

I think HMRC is going to have an absolute disaster with disputed returns, because HMRC itself is being inconsistent with advice, and has left in place a reporting system that does not allow an accurate report that would match with the rules that HMRC (mostly) says apply.

Swipe

I agree, this confusion could all be resolved by HMRC just taxing it annually for all terms and ask institutions to provide annual tax certs.

intalex

Swipe said:

I agree, this confusion could all be resolved by HMRC just taxing it annually for all terms and ask institutions to provide annual tax certs.

Not so easy either - if someone's opted for a 5-year fix with interest compounding in, they'd end up having to find other funds to pay tax in lieu of the first 3 years' interest in the interim since they won't be able to access the interest for all 5 years until maturity.

The solution is to transition the reporting routine to only report all interest at maturity, and until they do so, HMRC should leave it up to the saver to either pay tax in line with annual interest reporting (if they have other funds to pay interim tax) or individually reach out to HMRC to correct the taxability of interest.

Swipe

intalex said:

Swipe said:

I agree, this confusion could all be resolved by HMRC just taxing it annually for all terms and ask institutions to provide annual tax certs.

Not so easy either - if someone's opted for a 5-year fix with interest compounding in, they'd end up having to find other funds to pay tax in lieu of the first 3 years' interest in the interim since they won't be able to access the interest for all 5 years until maturity.

Not really, considering most have it clawed back via their tax codes. I expect most people are completely unaware of how much tax is due at maturity and prior to finding out, they've already locked the money away in a new fixed term. Of course this should all be spelled out clearly for any fixed term product.

intalex

Swipe said:

Not really, considering most have it clawed back via their tax codes.

Tax code adjustment means a negative cashflow impact on net earnings, so it's the same as paying tax from a different cash pot, and still means paying the tax well before being able to access the interest income that it's in lieu of.

With the old 20% deducted at source, it was easier because (some) tax was deducted automatically from the credited interest, and so this cash flow issue only affected higher rate tax payers who presumably may have had less constraints to afford it.