Tax on fixed savings accounts

fuzzzzy

Krakkkers said:

Yes. I was told that the banks report the interest annually whether you have it paid that way or not and the HMRC have to act on what the banks tell them. I was told i should take it up with the individual banks.

Do the terms and conditions of the account allow you to change your options on how interest is paid throughout the term of the account, or did you take the option to have interest compounded at the outset and that cannot be changed?

Notepad_Phil

sheramber said:

The OP has not confirmed whether he can withdraw from the account but pay a penalty or whether any withdrawals are forbidden.

In the case of the former the interest is taxable each year.

It is only if  no withdrawals are possible at all that it is only taxable at the end of the term.

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

Example 2

Sam entered into a five year fixed-term bond on 6 April 2017. The bond credits interest to Sam’s account annually on the 31 December. Sam can only gain access to both the annual interest and the principal in advance of 5 April 2022 if a penalty is paid for early access.

Since the terms and conditions of the bond allow Sam to draw on the funds, although with a penalty, the interest arises and is taxable each year as it is credited.

If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point.

But what do you mean by "withdrawals are forbidden"?

e.g. Suppose at the very beginning there was an option to pay the interest away, then it could be argued that even though someone may not have chosen that option that the terms and conditions did allow them access but they simply chose not to take that option, so interest is taxable on a yearly basis rather than at maturity.

This is what at least one hmrc admin person and apparently the Coventry building society hve said within https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688 - it would also tie in with what I've seen when looking at fixed term accounts in the past, where the only times I've seen a specific note that interest was taxable on maturity is where the account did not allow the option to pay the interest away.

sheramber

If money can withdrawn from the account , albeit there is penalty to pay to do so, then withdrawals are not forbidden. 

If you no option to withdraw money before maturity then withdrawals are forbidden. 

Simples

Notepad_Phil

sheramber said:

If money can withdrawn from the account , albeit there is penalty to pay to do so, then withdrawals are not forbidden. 

Yup, agree.

sheramber said:

If you no option to withdraw money before maturity then withdrawals are forbidden.

Still not 100% sure what you mean - but I think you mean that if there was an option and you chose not to pay the interest away then withdrawals are forbidden and so interest is taxable at maturity, which I'm not sure is what the hmrc guidelines when read in full would indicate.

sheramber said:

Simples

Obviously not, given the number of hmrc and mse threads on this

masonic

Presumably the scenario being discussed above is the one from the HMRC worked example: a fixed term account that permits withdrawals with a penalty. This is how all fixed cash ISAs work (not relevant for a discussion on tax, but illustrative) and there are one or two standard fixed term savings accounts that will permit this also, but the vast majority do not. 

It could also be relevant to a notice account spanning tax years where interest is paid towards the end of the tax year, but the notice period would extend into the next tax year - if a penalty could be paid to make an immediate withdrawal, then the interest would be taxable in the earlier tax year.

Notepad_Phil

masonic said:

Presumably the scenario being discussed above is the one from the HMRC worked example: a fixed term account that permits withdrawals with a penalty. This is how all fixed cash ISAs work (not relevant for a discussion on tax, but illustrative) and there are one or two standard fixed term savings accounts that will permit this also, but the vast majority do not.

I agree that the case where withdrawals on non-ISA fixed term accounts are permitted with a penalty is rare. I was really responding to the mention of 'withdrawals are forbidden' and asking what that actually meant when it came to be given an option to paying interest away but not taking that option.

masonic

Notepad_Phil said:

masonic said:

Presumably the scenario being discussed above is the one from the HMRC worked example: a fixed term account that permits withdrawals with a penalty. This is how all fixed cash ISAs work (not relevant for a discussion on tax, but illustrative) and there are one or two standard fixed term savings accounts that will permit this also, but the vast majority do not.

I was responding to the mention of 'withdrawals are forbidden' and asking what that actually meant when it came to be given an option to paying interest away but not taking that option.

I don't want to speak for sherambler, but I read that as an either/or statement. Either "money can be withdrawn from the account, albeit there is penalty to pay to do so", or it cannot. It cannot be withdrawn from the account if, after being credited, your provider would refuse to pay it out except in exceptional circumstances (such as extreme hardship or illness).

You do raise a good point that you could be given a choice of options by a savings provider, such as different fixed periods, different interest payment frequencies, or paying interest away vs compounding it. The latter choice can lead to a clear tax treatment if there is segregation between the products (for example NS&I Income Bonds vs Growth Bonds), but the situation is less clear (and perhaps even an opposing view can be taken) when you get to the other extreme of accounts where you can turn on or off the interest pay away option at any time.

sheramber

But do these accounts where you elect to add the interest to yhe account allow withdrawals with or without  penalty./

That is the first criteria. If they do allow you withdraw, albeit with a lenalty, then it does not matter whether interest is reinvested in that account or not.  The interest arising on these accounts is taxable annually.

The only investments I have seen that you cannot withdraw from , except in the exceptional circumstances stated. the interest is not added annually, but at the end of the term.  There is nothing to be taxed annually.

masonic

sheramber said:

But do these accounts where you elect to add the interest to yhe account allow withdrawals with or without  penalty./

That is the first criteria. If they do allow you withdraw, albeit with a lenalty, then it does not matter whether interest is reinvested in that account or not.  The interest arising on these accounts is taxable annually.

The only investments I have seen that you cannot withdraw from , except in the exceptional circumstances stated. the interest is not added annually, but at the end of the term.  There is nothing to be taxed annually.

I'm not aware of any fixed term accounts that permit withdrawals (other than those that are cash ISAs and must permit access by law). The majority of these add interest annually, some monthly. A good case in point is Zopa, who add interest monthly, but offer no option to have it paid away. They also state clearly in their account FAQ that because of the way the account operates, all of the interest arises for tax at maturity. See the What is the interest rate?, Can I withdraw money? and Additional Information sections here: https://savings.zopa.com/onboarding/new/summary?fixedTermSaverOption=depfixed60

Other examples that fall into this category include Nationwide BS, IS Bank, Cynergy bank and Tipton and Coseley BS

There are accounts that could be best described as 'limited access' that permit access with a penalty, but do not have a fixed term, so are not part of this discussion. The most flexibility I've heard of in traditional fixed term accounts is allowing the customer to change to a pay away arrangement for future interest payments mid-term, but I've not come across such an account myself.

There has been a school of thought that if you could have had the interest paid away (but elected not to during the application), you should still be taxed annually, but I can't get behind this logic, as the agreement that the provider will add interest added to the account, even if it was your choice, is binding upon being accepted for the account and so forms part of the contract. Most fixes give savers a choice at the start as to whether to compound or pay away, and so fall into this category. See, for example, Tandem, Al Rayan, Hampshire Trust Bank, Aldermore, RCI bank, United Trust bank, Cambridge BS, Gatehouse bank, Secure Trust bank, Hodge Bank, Ikano bank, Atom bank, Leek BS

Those who only pay interest at maturity include Union Bank of India, OakNorth Bank and Buckinghamshire BS.

The above providers are those listed on Moneyfacts offering rates of at least 5% AER on a 5 year fix. Overall, the breakdown is: 

• must compound, pay annually/monthly (6 providers); 
• offer compounding and pay-away variants, compounding variant pays annually/monthly (13 providers); 
• all interest credited at maturity (3 providers)

Albermarle

I'm not aware of any fixed term accounts that permit withdrawals (other than those that are cash ISAs and must permit access by law

Fixed term savings accounts from the LLoyds group ( such as Halifax) allow you to close the account with a penalty, in the same way you can close a fixed term ISA. Also First Direct allow you to close their one year fi for a £100 penalty.

Fixed Saver Account | Savings | Halifax ( Open the question ' can I withdraw money?) 

These are the exceptions though.