When you pay tax on savings, just spoken to HMRC

Dazed_and_C0nfused

These are extracts from the guidance banks have to follow,

Interest you do not need to include on a return

You should not report interest payable:

• to persons resident outside the UK

• to central monetary institutions and international organisations designated by order under section 774 of the Income Tax (Trading and Other Income) Act 2005 (see Appendix A)
• on certificates of deposit (including transferable paper)

• on Individual Savings Accounts (ISAs) unless the ISA is invalid or repaired

• on investments held at a branch situated outside the UK

• on Save As You Earn or Share Save Schemes

• to approved or registered pension schemes, you do not need to report interest paid to the trustees of a pension scheme, including a self-invested personal pension or small self-administered scheme approved or registered by HMRC

• to the trustees of a non-resident pension scheme for interest on the scheme

• in respect of syndicated loan interest

• on Child Trust Funds or Junior ISAs

• to persons holding funds on behalf of a person with a physical or mental health condition or disability as a result of a court order (such as criminal injuries compensation or personal injury awards)

• on inter-bank deposits

And

Making a BBSI return

You must report on all accounts that have interest paid or credited for any of your investors who are reportable persons with UK addresses.
This includes individuals, and non-individuals such as partnerships, associations, companies, clubs, executors and trustees.

Do not report accounts of persons with an address outside the UK. This includes companies not resident in the UK.

Usually, the information needed to decide if an investor is a reportable person is in your ‘Know your customer’ check. HMRC does not expect you to either:

• make further enquiries to establish this

• have prior knowledge of whether a customer is liable to pay tax before including them on your return

However we do require you to accurately categorise reportable persons to make sure tax is charged correctly.

pecunianonolet

I inquired about this to Atom Bank in March this year. The background was a 6 month bond, taken out end of November 2022, maturing end of May 2023. Interest was added to the bond monthly.

Here the response:

Hey pecunianonolet,

Firstly I'd just like to thank you for your patience whilst I was looking into your enquiry. I can now confirm that the amount of interest that will be reported will be from the start of the financial tax year, so from April 6th to April 5th. In your case pecunianonolet the interest earned from the account opening to the financial year cut off date would be reported to HMRC.

We would then report any interest earned from the start of the Financial year until the maturity of account.

I hope that makes sense and that I have answered your question. If you do have any further questions please don't hesitate to ask by relying to this email or calling us on 0333 399 0050 and we will be more than happy to answer any further questions that you may have.

Thank you,

[Advisor Name]

Atom Customer Support

In summary:

• 4 months worth of interest were reported to the tax year I took the bond out, 2 months to the current tax year

• I also took out a 9 and 12 month bond at the same time, of which both would have 4 months reported to the previous tax year, instead of this tax year

• My legal obligation would be to pick up the phone next tax year and notify HMRC that 4 months worth of interest are recorded against the wrong tax year for 3 different bonds and provide them the numbers, because I make the effort and track them

• It would bump me above my PSA for this tax year and without the 4 months, I stay just within the PSA 

• Most people don't track their interest, why would they when they know banks have to report it and issue interest statements accordingly

• If you don't get a P800 because you are within the PSA (assuming no other reasons to get a P800 in the first place), why would you take any additional action poking the bear?

• Many people underpay taxes unknowingly 

• I assume 99% of the people don't know the rules in such fine detail as people here so why would they question anything

A law, the majority of people and even government employed advisors at HMRC don't know about isn't worth the paper it is written on.

I won't be poking the bear.

intalex

masonic said:

The event that threw an additional spanner in the works was not rates changing, it was the end of income tax being deducted at source and introduction of a nil-rate band (Personal Savings Allowance), meaning that different amounts of tax were more likely depending on when interest arises, and that basic rate taxpayers had to pay it (normally) from their other income.

Ahh yes, so it wasn't an issue up to TY15/16 because basic rate tax was deducted when interest was credited, and wasn't a discussion from TY16/17 until recently due to low interest rates.

And up to TY15/16, higher rate tax was also paid annually based on how much interest was credited in each tax year, but this interim negative cash flow was justified under the assumption that a higher rate taxpayer should have enough surplus cash to afford it.

And now the tax rule has completely flipped it to avoid the negative cash flow situation for everyone. The choice of pay-in vs pay-away interest on multi-year fixes has now got to be considered together with personal tax impact before committing, but how many savers were/are privy to this rule when they made/make that choice???

Imagine £64k saved in a 5-year fix at 5.85% AER which with compounding would yield £21k interest, with annual tax certificates arguably alluding to interest being taxable annually, and then discovery of the rule down the line...

Ozzig

Following Ben's update, the problem is still HMRC answering the same question with two answers.

I planned mine based on maturity taxation not annual, do I keep calling HMRC until I get an advisor that agrees with me?
Their help forum admins said annual and on maturity and from anecdotal evidence so have the advisors on the phone.

What if I call about another issue and in passing the next advisor disagrees and advises I should change it?

Then same question other way around for those planning based on annual taxation.

interest_Ted

Thanks to Masonic for pointing us to the Income Tax Act 2005, section 370.

The explanatory notes attached to this Act, include note 1507 which says

The word “arising” has been the subject of a number of tax cases. “Arising” includes received and also credited to a bank account (Parkside Leasing v Smith (1984), 58 TC 282(9) HC). However, “arising” has a wider meaning than this. For example, it was held in Dunmore v McGowan (1978), 52 TC 307(10) CA, to include the “swelling of a person’s assets”, even where the person had no immediate right of access to the income. In view of the wide meaning given to “arising”, and the fact that it is a term with which practitioners are familiar, the word has been retained.

As this mentions that it applies even when where there is no immediate right of access, this seems to be quite at odds with statements from HMRC and others that you are taxed only in the year you can access it.   Or have I misread something?

Ted

Olinda99

have a look at the Parkside Leasing case and Dunmore v McGowan (google them)

PL is about no arising tax liability until a cheque is cashed ie simple possession of the cheque  does not count 

DM is about interest owned by a taxpayer but deposited into an account owned by the bank to offset interest on a loan and thus the taxpayer was deemed to have had the benefit of it

masonic

interest_Ted said:

Thanks to Masonic for pointing us to the Income Tax Act 2005, section 370.

The explanatory notes attached to this Act, include note 1507 which says

The word “arising” has been the subject of a number of tax cases. “Arising” includes received and also credited to a bank account (Parkside Leasing v Smith (1984), 58 TC 282(9) HC). However, “arising” has a wider meaning than this. For example, it was held in Dunmore v McGowan (1978), 52 TC 307(10) CA, to include the “swelling of a person’s assets”, even where the person had no immediate right of access to the income. In view of the wide meaning given to “arising”, and the fact that it is a term with which practitioners are familiar, the word has been retained.

As this mentions that it applies even when where there is no immediate right of access, this seems to be quite at odds with statements from HMRC and others that you are taxed only in the year you can access it.   Or have I misread something?

Ted

As Olinda99 outlines, the example given, in simple terms, was of an individual trying to disclaim interest using what he thought was a loophole in the much older Income Tax Act 1952. He arranged to have sums including interest paid into a bank account he was using to offset a loan that wasn't wasn't opened in his name directly. It would be not be so very different than telling HMRC you didn't need to pay tax on income because it was paid into a bank account that was in unauthorised overdraft.

It is a specific scenario in which income was deemed to be taxable when credited to an account, even when there was no immediate right of access, but it does not mean that interest arises in all scenarios where it is credited without immediate right of access. The example was presumably used to illustrate that "arising" has lots of subtleties, but as it goes on to say, the meaning is well understood in legal circles. It's worth noting that HMRC quote this very passage in their SAIM around the topic of interest arising, see: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2400

Ocelot

Then reality on this subject seems to be that the financial institutions will report annually to HMRC, and you will be taxed on it, whether you have access to the funds or not . However, this may not occur if you did not have the option of monthly or annual interest, and/or the interest was always paid only at maturity.

masonic

Ocelot said:

Then reality on this subject seems to be that the financial institutions will report annually to HMRC, and you will be taxed on it, whether you have access to the funds or not . However, this may not occur if you did not have the option of monthly or annual interest, and/or the interest was always paid only at maturity.

Essentially if the interest is all credited to the account at maturity, then banks can report it to HMRC at maturity. Otherwise it is reported in the tax year credited. For multi-year accounts with no access to the interest, reported == credited, but reported != arises.

badmemory

I wish everyone luck in trying to correct HMRCs version of taxable interest figures.  Several years of it & I will accept theirs until they want too much tax from me.