When you pay tax on savings, just spoken to HMRC

masonic

I think it's important to note that, other than the edge cases where people's marginal rate of tax was affected, before the PSA people with multi-year fixes effectively just paid some of their tax in instalments in the earlier years and it balanced out at maturity, so they never underpaid tax.

Now we have a situation where there is a small nil-rate band that gets easily overwhelmed by tax at maturity, so most will underpay if taxed annually vs at maturity. Fiscal drag in the late 2010s and 2020s has also meant more taxpayers are now close to the top of the basic rate band.

Essentially this is the guts of why this has became a much more widely occurring problem.

In a sense, I think HMRC had no choice but to overlook in the past, because there was no way they could gather all the required information without bringing in mandatory tax returns for all. We now have the technological capability, but no information is currently being gathered.

I do agree that there has been a very poor communication effort around this, but it seems as though HMRC don't want to deal with it at all for those not self-assessing. But they aren't even communicating it pro-actively to those who do complete a tax return.

The fact HMRC cannot easily determine when any interest arises for tax does put them in a rather difficult position around enforcement.

It is those whose income is due to fall and who would benefit from taxation at maturity who stand to lose under the automated reporting system, and there is evidence they can't easily correct HMRC once the figures from the banks come in. It is much easier for those who submit a tax return.

intalex

masonic said:

It is those whose income is due to fall and who would benefit from taxation at maturity who stand to lose under the automated reporting system, and there is evidence they can't easily correct HMRC once the figures from the banks come in. It is much easier for those who submit a tax return.

Well, the written rule is clearly in the favour of this presumable minority, so they at least have something to defend their case with. But in my opinion, aside from the temporary negative cash flow angle, it is no more than a loophole to exploit.

Whereas I imagine the vast majority are under the recent spell of wage rises, frozen allowances/thresholds and higher savings interest, and therefore more likely to be in higher tax paying buckets down the line than they are now, to add to their inability to utilise their PSA in the interim years towards any interest credited. For most of these individuals it would make more sense to absorb the temporary negative cash flow (provided they can) by choosing annual taxation rather than tax all on maturity, and the self-assessment payment deadline of 31/01 is something of a partial cushion to help alleviate the pain of the temporary negative cash flow. Or if the temporary negative cash flow is such a no-go, then they can always opt for pay-away interest accounts/options so they can access the cash interest to pay their taxes from, simples.

I have clearly developed an objection to this whole "arises when accessible" rule, as I can find too many arguments against it and very little for it, but maybe I'm missing something. Maybe it wasn't just the temporary negative cash flow issue behind it (easily overcome by avoiding pay-in accounts/options), could it have been deliberately set up this way to benefit those who are planning their retirement (or career break), to give them a little extra help via calculated tax planning??

masonic

I suspect you were right with your original deduction that the original reasoning behind it is to avoid the unsavoury principle of someone paying tax before they had the benefit of the income upon which that tax was paid.

Dazed_and_C0nfused

masonic said:

I suspect you were right with your original deduction that the original reasoning behind it is to avoid the unsavoury principle of someone paying tax before they had the benefit of the income upon which that tax was paid.

That really isn't all that unusual though.

If we ignore the main topic in this discussion and assume a simple scenario where someone has recurring one year fixes receiving interest on 31 December each year.  £1,000 of the interest being taxable at 0% and the rest at 20%.

Once HMRC are notified of the interest they will update tax codes for subsequent years on the assumption the interest will continue and therefore tax on the interest will be paid from payday 1 onwards in a year when the interest won't be received until 31 December.

I suspect that will be impacting far more people than the (perfectly valid) thrust of this thread.

Ayr_Rage

Dazed_and_C0nfused said:

masonic said:

I suspect you were right with your original deduction that the original reasoning behind it is to avoid the unsavoury principle of someone paying tax before they had the benefit of the income upon which that tax was paid.

That really isn't all that unusual though.

If we ignore the main topic in this discussion and assume a simple scenario where someone has recurring one year fixes receiving interest on 31 December each year.  £1,000 of the interest being taxable at 0% and the rest at 20%.

Once HMRC are notified of the interest they will update tax codes for subsequent years on the assumption the interest will continue and therefore tax on the interest will be paid from payday 1 onwards in a year when the interest won't be received until 31 December.

I suspect that will be impacting far more people than the (perfectly valid) thrust of this thread.

That's why my gentleman's agreement with HMRC of the full personal allowance every year. then SA and a balancing payment on 31st January works so well.

I pay what I owe in arrears and HMRC are never guessing as to the amount I will be receiving and messing with my tax code.

The debate as to when HMRC deem the interest is paid never seems to be an issue, I declare what the companies provide by way of certificates annually, put that in the box and as that must be tallying with HMRC records, pay the appropriate tax.

Not once have they queried why I have declared so called inaccessible interest and said "you don't need to include that until maturity"

I suspect they don't have a scooby if it's a 3 month or a 10 year product, they just see Mr S has received £XX.xx from YYY and they have both declared the same, so we'll have some of that, to the penny every time for the last 20 years for me.

EthicsGradient

Ayr_Rage said:

Dazed_and_C0nfused said:

masonic said:

I suspect you were right with your original deduction that the original reasoning behind it is to avoid the unsavoury principle of someone paying tax before they had the benefit of the income upon which that tax was paid.

That really isn't all that unusual though.

If we ignore the main topic in this discussion and assume a simple scenario where someone has recurring one year fixes receiving interest on 31 December each year.  £1,000 of the interest being taxable at 0% and the rest at 20%.

Once HMRC are notified of the interest they will update tax codes for subsequent years on the assumption the interest will continue and therefore tax on the interest will be paid from payday 1 onwards in a year when the interest won't be received until 31 December.

I suspect that will be impacting far more people than the (perfectly valid) thrust of this thread.

That's why my gentleman's agreement with HMRC of the full personal allowance every year. then SA and a balancing payment on 31st January works so well.

I pay what I owe in arrears and HMRC are never guessing as to the amount I will be receiving and messing with my tax code.

The debate as to when HMRC deem the interest is paid never seems to be an issue, I declare what the companies provide by way of certificates annually, put that in the box and as that must be tallying with HMRC records, pay the appropriate tax.

Not once have they queried why I have declared so called inaccessible interest and said "you don't need to include that until maturity"

I suspect they don't have a scooby if it's a 3 month or a 10 year product, they just see Mr S has received £XX.xx from YYY and they have both declared the same, so we'll have some of that, to the penny every time for the last 20 years for me.

This illustrates, I think, the problem that HMRC are inconsistent - one agent has agreed with you to not follow their manual, but do the taxes every year; another tells a member of the public they ought to be reclaiming the yearly tax from past years, and then repaying it when accounts mature and the interest is finally accessible.

I suspect most HMRC employees just don't have the time to track down what's really happened with individuals, and so go with whatever's easiest - using the information from banks for PAYE calculations, or accepting the word of people who do self-assessment. But that can leave the public worrying "what if they do decide they're going to go by the book with me, and they find out I've paid less than I should have, according to the manual? Will I be fined? Or just made to pay it, plus interest?".

You'd like to think that the obvious confusion over this would mean that in any audit, HMRC would admit their messages and instructions have been so mixed up that there wouldn't be fines. But then you read about and listen to what happened in the Post Office Horizon scandal, and you remember that government organizations can sometimes not care at all about what is fair or right (or, in that case, legal), and work only to cover their own behinds and get their bonuses.

intalex

Is the clarification enquiry to HMRC by the helpful MSE admins about the most we can expect from MSE?

Is there no possibility to reach some higher-ups at HMRC to discuss the pros, cons and incentives (plenty of points discussed on this thread and probably on HMRC forums) of the written rules and routines and have them reviewed objectively?

masonic

MSE is in a difficult position. It has been given the correct legal position multiple times by HMRC, and it's reasonable for them to take the information on good faith and not accuse HMRC of being evasive about what happens in practice. Meanwhile, nobody has yet been pursued following their interest being taxed incorrectly. Perhaps what is needed is an aggrieved retiree who has been disadvantaged by being taxed annually. To do their consumer champion thing, they need a group of consumers to champion.

Meanwhile, I would recommend avoiding accumulating multi-year fixes that credit interim interest without permitting access.

Ozzig

Sorry to be a negative nelly, but surely this is something that should have been covered on last night's show, in the section covering fixed-term bonds, when interest was to be paid, and the tax implications ??

MeteredOut

Ozzig said:

Sorry to be a negative nelly, but surely this is something that should have been covered on last night's show, in the section covering fixed-term bonds, when interest was to be paid, and the tax implications ??

The show is for the masses, not for the intricacies of interest taxation.

I'd say the more glaring miss was not mentioning the £5K starting rate for savings, and how a house hold with one person working and one not (or with a low income) could utilise that.