When you pay tax on savings, just spoken to HMRC

Ocelot

Ozzig said:

masonic said:

Yes I remember that post, and there was much celebration by some who were looking for precisely that answer and had been probing for some time the right question to elicit it. However, IIRC, after that response followed another clarification that the saver chose the product that was inaccesssible and therefore the HMRC Admin did a volte-face, as they misunderstood that the interest was accessible, but the saver was just choosing not to withdraw the interest. Half the problem with the HMRC forum discussions is the Admins misunderstanding the precise nature of the accounts in question (besides refusing to acknowledge what the banks are reporting to them is not always interest arising).

I think I know the one you're referring to, but the one I quoted goes on to mention NS&I growth bonds ... 
https://community.hmrc.gov.uk/customerforums/pt/4c90d80d-db77-ed11-97b0-00155d9c7b3d

The final paragraph from the HMRC admin clarifies with ...

"An individuals tax liability is always calculated using the 'arising basis'. There are very few exceptions to this in the area of remittance. What this means is that income is taxable in the year in which it arises. In the case of GGB's, this would be the date the bonds mature, where you are unable to access the bonds for the whole term, until maturity. If you are able to access the bonds, then the interest would be taxable each tax year, in the year it arises."

Just tried to find the one you're thinking of, 948 results for "fixed bond" but I did find a relatively recent reply (five pager this one), which again contradicts the advice I received when I called  ...

Posted 14 days ago by HMRC Admin 25 

Hi username,
Income tax is applied using the arising basis, that is income is taxed in the year in which it arises.
Where your bonds generate interest every year, which you have access to, you must declare it in the tax year it arises.
If the bonds cannot be accessed until maturity, then only when they mature, can the be declared for tax purposes.
Thank you. 

It's a shame they don't follow their own advice in practice.

DavidAC

Many banks might not follow that rule either and send interest statements to HMRC every year regardless. I doubt HMRC will know if it is accessible before maturity.

fuzzzzy

God what a mess this whole tax on interest debacle is. See another thread

https://forums.moneysavingexpert.com/discussion/6485899/savings-tax

Castle Trust telling people they MAY have to report annually on a 2 year account that only allows interest compounded and does not pay out until maturity. Clearly tax should not be reported annually in this instance and they will just confuse people.

masonic

DavidAC said:

Many banks might not follow that rule either and send interest statements to HMRC every year regardless. I doubt HMRC will know if it is accessible before maturity.

The rules are different for bank reporting. They must always report all interest credited, whether it arises for tax or not. The bank reports aren't suitable to be used to generate a reliable taxable interest figure.

DavidAC

They report the interest credited, but do they say when it is accessible? If not then that is the problem if interest is credited each anniversary of a fixed rate account but is not accessible until maturity.

masonic

DavidAC said:

They report the interest credited, but do they say when it is accessible? If not then that is the problem if interest is credited each anniversary of a fixed rate account but is not accessible until maturity.

No, there is no facility for banks to indicate whether or when interest arises in the electronic records they provide to HMRC detailing interest credited. This is exactly the problem for taxpayers who don't self-assess or don't know that interest is taxed on an arising basis.

The only solution that doesn't require a change in legislation is for banks to stop pointlessly crediting inaccessible interest and instead add it all at maturity.

Ocelot

Strangely, I received my annual P800 today, and this time they say they owe me £430! Makes a nice change.

intalex

masonic said:

The rules are different for bank reporting. They must always report all interest credited, whether it arises for tax or not. The bank reports aren't suitable to be used to generate a reliable taxable interest figure.

What use does it serve to report interest credited within the tax year when taxation itself has a different rule?

In the past it used to serve a specific purpose in that taxation was aligned to interest credited, regardless of accessibility - direct deduction for basic rate tax payers and via SA/calculation for higher/additional rate tax payers.

It's obvious the reporting has been overlooked when PSA and the rule of taxing all on maturity was introduced, the evidence being that HMRC simply assume reporting = taxation as a default. 

Can they seriously expect ALL savers to be aware of the "correct" rule to get it corrected individually? I say all because just because someone slips through under the radar by not requiring to complete a self-assessment doesn't mean they end up off the hook any more than someone who is required to complete a self-assessment. It's exactly the same ignorance of written rules and equally at fault.

How many people will be caught unawares through (arguably) no material fault of their own to pick up on this very specific rule change that is pretty much a u-turn from taxation = credited interest to taxation = accessible interest, with the introduction of PSA.

If they really want to apply this "tax all at maturity" rule, then they need to onboard all the savings institutions first and have them flag this point in their product information, and also have them align their reporting to taxability, not just continue with the annual declarations which serve no purpose and instead induce HMRC to tax savers "incorrectly".

EDIT: And the reporting is actually called "Tax Certificate for a Specific Tax Year", so no one can deny that its purpose is to inform taxability for that tax year. This comes from the savings institution, is that the saver's obligation to correct at HMRC's end?

masonic

intalex said:

masonic said:

The rules are different for bank reporting. They must always report all interest credited, whether it arises for tax or not. The bank reports aren't suitable to be used to generate a reliable taxable interest figure.

What use does it serve to report interest credited within the tax year when taxation itself has a different rule?

That is unclear, possibly nobody envisaged the scenario where this would occur (certainly nobody at HMRC seems to be willing to acknowledge the scenario now). But for me, the more pertinent question is what use is it to credit inaccessible interest when you could instead keep the same AER and credit it all at maturity?

intalex said:

In the past it used to serve a specific purpose in that taxation was aligned to interest credited, regardless of accessibility - direct deduction for basic rate tax payers and via SA/calculation for higher/additional rate tax payers.

It's obvious the reporting has been overlooked when PSA and the rule of taxing all on maturity was introduced, the evidence being that HMRC simply assume reporting = taxation as a default.

No, this is not a new thing. Basic rate taxpayers who took out multi-year fixes prior to the PSA would have had basic rate tax deducted at source from interest that may not have arisen until maturity, but the chance of this resulting in a different overall amount of tax being paid was small (effectively they'd just be paying in instalments in advance). The PSA has caused many more people to pay the wrong amount of tax due to the already flawed system.

intalex said:

Can they seriously expect ALL savers to be aware of the "correct" rule to get it corrected individually? I say all because just because someone slips through under the radar by not requiring to complete a self-assessment doesn't mean they end up off the hook any more than someone who is required to complete a self-assessment. It's exactly the same ignorance of written rules and equally at fault.

How many people will be caught unawares through (arguably) no material fault of their own to pick up on this very specific rule change that is pretty much a u-turn from taxation = credited interest to taxation = accessible interest, with the introduction of PSA.

If they really want to apply this "tax all at maturity" rule, then they need to onboard all the savings institutions first and have them flag this point in their product information, and also have them align their reporting to taxability, not just continue with the annual declarations which serve no purpose and instead induce HMRC to tax savers "incorrectly".

HMRC is currently suffering cognitive dissonance about this. It is simultaneously stating the rules while refusing to acknowledge that it cannot apply the rules to a tax calculation using the information it receives from savings institutions. We also have at least one anecdotal report of someone at HMRC refusing to accept a corrected figure from a PAYE taxpayer.

Some savings institutions are very good about pointing out that all of the interest is taxable at maturity, but they don't tell savers that they would need to intervene in order to make this so. 

I'm in full agreement that the application of these rules is a complete mess.

At the present time, my preferred solution would be the banning of savings institutions crediting inaccessible interest. It can accrue at the same AER and a higher gross rate, or accrue and compound virtually. Problem solved.

intalex

masonic said:

No, this is not a new thing. Basic rate taxpayers who took out multi-year fixes prior to the PSA would have had basic rate tax deducted at source from interest that may not have arisen until maturity, but the chance of this resulting in a different overall amount of tax being paid was small. The PSA has just caused many more people to pay a different amount of tax due to the already flawed system.

For basic rate tax payers, they paid interest annually by virtue of it being deducted at source. Overall, this would have benefited quite significantly especially if they were borderline basic rate with the annual interest at basic rate, as otherwise under the new rules they would have been taxed 5 years' worth of interest in the 5th (maturity) year having about 4 years' worth of interest taxed at the higher rate just by virtue of all of it arising in the 5th year.

And higher/additional rate taxpayers paid the basic rate portion via deduction at source and also funded the higher/additional tax on the savings credited in the tax year from their own cash flows well ahead of being able to access any of that interest.

Therefore, the rule change is very much a new thing and 100% does change the game for all savers.