When you pay tax on savings, just spoken to HMRC

Albermarle

boingy said:

It all depends on what is on those certificates of interest and how often the bank issue them. The problem is that different banks do different things.

Plus if you call them to ask what their procedures are, you will quite likely not get the right answer, as many of the staff have no idea.

aroominyork

This doesn't just need HMRC to be clear with their guidance - it needs the Treasury to clarify or, better, change the rule in the Autumn Statement. All tax being payable on maturity of a multi-year bond is a disincentive to good financial planning. Either interest should always be reported and taxed annually (even it the interest cannot be accessed until maturity), or the saver should have the option when taking out the bond of whether interest is declared and paid annually or on maturity.

intalex

aroominyork said:

This doesn't just need HMRC to be clear with their guidance - it needs the Treasury to clarify or, better, change the rule in the Autumn Statement. All tax being payable on maturity of a multi-year bond is a disincentive to good financial planning. Either interest should always be reported and taxed annually (even it the interest cannot be accessed until maturity), or the saver should have the option when taking out the bond of whether interest is declared and paid annually or on maturity.

Agreed - the default should always be to credit/report/tax annually with optionality to report/tax on maturity.
Otherwise, it's a penalty just to want to enjoy the perfectly legitimate art of compounding!

caper7

subjecttocontract said:

Ozzig said:

refluxer said:

My question is - if a bank offering a fixed rate account (of more than 1 year's duration) issues a certificate of interest annually, is that definite proof that they're also reporting that interest to HMRC on an annual basis ? 

The advisor I spoke to is sending me a letter to show which banks have advised them of how much interest, but the total amount he gave me is just £9 short of what I calculated as all the interest/accrument for that year across everything.

Earlier in the year I asked each bank if they declared interest on bonds where the money is not accessible and had a range of answers from,

No, you have to register it yourself.
No, we only declare it when the bond matures.
Yes, every year we declare it even if not available.

So regardless of their actual answers, so far it appears they do.

That brings to mind a recent HMRC TV ad telling us......Tax doesn't need to be taxing !......😠😠

Doesn't need to be, but clearly, unfortunately is. 
If their own advisors can't agree, I fail to see how the average tax payer is supposed to know which way is up. 
HMRC need to simply issue a clear statement on the matter. 

masonic

caper7 said:
HMRC need to simply issue a clear statement on the matter. 

What's needed is a change in the legislation, as that is clear (and not consistent with what has been happening in practice). The only clear statement HMRC could issue is that all taxpayers need to contact them to give a correct breakdown of interest arising for the period they hold any multi-year fix that neither permits early access nor pays away the interest. My interpretation of their approach at present is that they don't want to admit the failings in the current system, nor place a burden on those who don't self-assess.

EthicsGradient

Just to throw something more into the pot - it seems calling HMRC can still get you a different opinion - from 16 days ago, on the HMRC forum:

"I've not seen anyone mention the problem of those who've already been paying tax annually on interest on these bonds for years. I spoke to HMRC this morning and after he'd checked on the SAIM guidelines (it was worrying that he didn't know about this until he'd looked) I was told that I had to amend my last 2 years tax returns and put in written claims for previous years so that all the tax is returned to me. Then I can pay it when due at maturity, some in just a year or so, Crazy! I was also told to ask each of my banks and building societies (12 of them) what their individual policies were on taxation. You can imagine the sort of response I got from the helplines I tried! At the best they all said it was nothing to do with them and speak to HMRC! This is going to take me months to sort out."

And an HMRC reply:

"The guidance was first published on 19/3/2016. If you have declared income when the rules state you shouldn't, you can ask for an amendment. As we can only go back 4 years, 19/20 is the first year that you can have reviewed. Maturity dates is between you and NS&I or any other provider that you have the bonds with and again any interest on statements is for you to discuss with the provider to give you a breakdown. As you are now aware of the situation, there would be no need to declare annually if you do not meet the criteria so would not be paying the tax twice and the interest would be correctly declared and taxed when it should be."

https://community.hmrc.gov.uk/customerforums/pt/097f17c5-77af-ed11-9ac4-00155d975688?page=4

They really do have a "it's not our problem" attitude.

intalex

masonic said:

caper7 said:
HMRC need to simply issue a clear statement on the matter. 

What's needed is a change in the legislation, as that is clear (and not consistent with what has been happening in practice). The only clear statement HMRC could issue is that all taxpayers need to contact them to give a correct breakdown of interest arising for the period they hold any multi-year fix that neither permits early access nor pays away the interest. My interpretation of their approach at present is that they don't want to admit the failings in the current system, nor place a burden on those who don't self-assess.

My guess would be that they've set the rule implying tax on maturity for the simple reason that taxpayers may not have alternative funds to pay annual tax in the interim if they can't access the gross interest to pay it from.

But that's why it should be okay to provide optionality over tax on maturity rather than mandating it for everyone. When tax is credited annually, it is capitalised into the principal and starts earning its "own" interest (i.e. compounding) which makes the credited interest about as crystallised at that point as any other income could be, regardless of accessibility.

Even the differentiation between accounts that offer the choice to pay away interest annually and those that don't should be irrelevant, given that savers could have always wanted to pay in interest and achieve compounding, and accordingly made the conscious and deliberate choice of taking the "rigid" latter option in much the same way as they would in choosing the pay-in option on the "flexible" former option.

Tax certificates are (and have always been) generally aligned to when interest is credited and starts earning its "own" interest, and it would be easiest to align everything to this as a default (as some of us thought was always the case), but then allowing optionality to be taxed on maturity by contacting HMRC and requesting this on merit of not having alternative funds to pay the annual tax from. Obviously such an option will be taken advantage of by some savers whose tax allowances / lower tax brackets are more freed up and favourable in maturity years vs interim years.

Also, I haven't seen this discussion come up until within the last year or so, but I guess that's maybe because the lower interest rates made the difference in tax impact less material then.

masonic

intalex said:

masonic said:

caper7 said:
HMRC need to simply issue a clear statement on the matter. 

What's needed is a change in the legislation, as that is clear (and not consistent with what has been happening in practice). The only clear statement HMRC could issue is that all taxpayers need to contact them to give a correct breakdown of interest arising for the period they hold any multi-year fix that neither permits early access nor pays away the interest. My interpretation of their approach at present is that they don't want to admit the failings in the current system, nor place a burden on those who don't self-assess.

My guess would be that they've set the rule implying tax on maturity for the simple reason that taxpayers may not have alternative funds to pay annual tax in the interim if they can't access the gross interest to pay it from.

But that's why it should be okay to provide optionality over tax on maturity rather than mandating it for everyone. When tax is credited annually, it is capitalised into the principal and starts earning its "own" interest (i.e. compounding) which makes the credited interest about as crystallised at that point as any other income could be, regardless of accessibility.

Even the differentiation between accounts that offer the choice to pay away interest annually and those that don't should be irrelevant, given that savers could have always wanted to pay in interest and achieve compounding, and accordingly made the conscious and deliberate choice of taking the "rigid" latter option in much the same way as they would in choosing the pay-in option on the "flexible" former option.

Tax certificates are (and have always been) generally aligned to when interest is credited and starts earning its "own" interest, and it would be easiest to align everything to this as a default (as some of us thought was always the case), but then allowing optionality to be taxed on maturity by contacting HMRC and requesting this on merit of not having alternative funds to pay the annual tax from. Obviously such an option will be taken advantage of by some savers whose tax allowances / lower tax brackets are more freed up and favourable in maturity years vs interim years.

Also, I haven't seen this discussion come up until within the last year or so, but I guess that's maybe because the lower interest rates made the difference in tax impact less material then.

That's surely the principle behind the rule. It became much more of an issue with the introduction of the Personal Savings Allowance and end to deduction of basic rate tax at source. Before then, the vast majority of people who needed to pay additional tax were filling out a tax return anyway, and those who didn't pay tax could register for gross interest. There would have been a very small number of people for whom interest taxable at maturity would result in them moving into a different tax band.

Now we have the much more likely scenario of someone paying different amounts of tax based on when interest arises: tax at maturity pushing someone from within PSA to outside of it; consuming PSA and the starting rate for savings for those on a low income; or pushing them into the higher rate band. All of which will have been made far more of a problem by the low interest rate regime coming to an end as you say.

Your suggestion (let the taxpayer choose the most favourable option for them) is one potential change that could address this (one that some accountants would say is already possible, but HMRC vehemently opposes when suggested). Another is to exempt inaccessible interest from banks' annual returns, instead treating it as accrued interest that isn't reported until the account matures. A third is to require all accounts to offer a pay away option and treat all interest as arising when it is paid whether or not the taxpayer has chosen to access it at the start of the agreement. There are probably others.

spider42

Although this problem is largely of HMRC's own making (by not ensuring that tax certificates issued by banks correspond with HMRC's interpretation of when interest has been 'paid'), the banks could also very easily avoid any doubt by ensuring that it would be theoretically possible to access the interest, but with a penalty.

HMRC guidance at SAIM2440 says that interest is treated as accessible (and therefore taxable), even if there is a penalty for withdrawing it. So all the banks would need to do would be allow interest credited to their fixed rate bonds to be withdrawn, but subject to a penalty charge of 99.99% of the amount withdrawn. Then then makes it 'accessible' (and therefore taxable) as far as HMRC are concerned, but in practice no saver in their right mind would ever use that option, and so in reality the interest would remain in the account and compound until the end of the fixed rate period.

MSE_Ben_T

Ozzig said:

The MSE article here 

https://www.moneysavingexpert.com/savings/personal-savings-allowance/

Advises " You're taxed on savings interest in the tax year you can access it "

Just called HMRC and the advisor confirmed the tax is due when they receive notification from the bank you're been paid it, not when you have access to it.
A 5-year bond would require tax to be paid in each of the five years, on each year's accrued interest.

I know from previously asking here and on the HMRC forum that I will get answers that both contradict and support this, from forum users and HMRC admins.

So, can we ask the MSE team if it is possible to use their might to get formal clarification?
Or at least re-word the article in the meantime?

Personally, I'd rather the former, ideally before I submit my SA for 22-23
But the latter is potentially misleading as it stands.

I suspect there will be a million and one potential replies to my thread all anecdotally proving the advisor I spoke to as being right or wrong and explaining how individuals have only declared accessible interest or have always declared paid interest.

Good afternoon, 

Just responding to requests for a confirmation of the validity of the info on our PSA page / of HMRC's official line on this matter. We have been in contact with HMRC multiple times on this issue in the past, and again in this instance, and they have always confirmed that our advice is correct, and that it's when you can 'access' your interest that matters. 

Therefore, if you have a fixed-rate savings account longer than a year, and choose for interest to be paid at maturity (or if you choose to have monthly or annual interest paid into the fixed savings account), then all that interest is counted towards the final year's PSA. 

Hope this helps, 

MSE Ben