When you pay tax on savings, just spoken to HMRC

fuzzzzy

If you have a fixed term account, 1 year say, and your maturity options allow you to roll the balance, including the maturing interest, over into another fixed term account, when does the interest arise and become taxable for the original fixed term account? You have the option of accessing the interest but you don't. This to me seems very similar to the scenario of having a multi-year account which allows you to choose the option of having the interest either compounded or paid away at any time, either annually or monthly, during the term of the account. I would have thought that if the interest in the first scenario was judged to be taxable when the account matured, even though the interest was not accessed, then it should follow that the interest in the second scenario should be taxed annually. I wonder what HMRC would say about the first scenario.

ryaneberry

What is strange (but understandable) is that HMRC requires UK GAAP on companies - which uses the accrual method for everything (not just interest). My assumption for this is that companies will have accountants for whom this will be standard. But for the average Joe, accrual method will be more complicated and cause more pain than anything else

I would argue you could / should use accrual for your own interest, however for tax year 22/23 it would be in the tax payer's favour 99% of the time to "bring forward" interest earlier to use up the £1,000 / £500 allowance (which otherwise would be wasted). I'll be preparing my SA on the accruals basis...

masonic

fuzzzzy said:

If you have a fixed term account, 1 year say, and your maturity options allow you to roll the balance, including the maturing interest, over into another fixed term account, when does the interest arise and become taxable for the original fixed term account? You have the option of accessing the interest but you don't. This to me seems very similar to the scenario of having a multi-year account which allows you to choose the option of having the interest either compounded or paid away at any time, either annually or monthly, during the term of the account. I would have thought that if the interest in the first scenario was judged to be taxable when the account matured, even though the interest was not accessed, then it should follow that the interest in the second scenario should be taxed annually. I wonder what HMRC would say about the first scenario.

In the first example, the original account's interest was accessed, evidenced by the fact that after it was paid you were able to get it moved into a different account. Furthermore, the T&Cs of the account would state the period during which no withdrawals could be made, ending when the account matured. Interest arises in the tax year it can be accessed (including with penalty or notice) under the terms of the agreement. HMRC have been asked about the second scenario, and have said it would be taxed at maturity if not paid away because from the point it is paid it cannot be accessed until maturity.

masonic

ryaneberry said:

I would argue you could / should use accrual for your own interest, however for tax year 22/23 it would be in the tax payer's favour 99% of the time to "bring forward" interest earlier to use up the £1,000 / £500 allowance (which otherwise would be wasted). I'll be preparing my SA on the accruals basis...

Someone previously stated a few years ago on this forum that their accountant told them they could elect to do this, however, HMRC have stated on a number of occasions on their forum that taxpayers don't get to choose when their interest arises for tax. Nevertheless, those who don't self-assess or contact HMRC with details of their interest will be incorrectly paying tax on non-arising interest from multi-year fixes annually, but will have a better excuse if they get caught underpaying as a result.

aroominyork

If you self-assess and declare interest on a multi-year bond where the interest is not credited or accessible until maturity - imagine you pay a small amount of over-PSA tax each year rather than a large amount on maturity - will HMRC will send a corrected tax return after the banks send HMRC details of the interest they paid out? And will HMRC then refund or adjust your tax code to return the (small amount of) tax you incorrectly paid?

Dazed_and_C0nfused

aroominyork said:

If you self-assess and declare interest on a multi-year bond where the interest is not credited or accessible until maturity - imagine you pay a small amount of over-PSA tax each year rather than a large amount on maturity - will HMRC will send a corrected tax return after the banks send HMRC details of the interest they paid out? And will HMRC then refund or adjust your tax code to return the (small amount of) tax you incorrectly paid?

No, for something like that if HMRC don't like what you have entered on your return they will open an investigation/enquiry into your return.

Other than in very limited circumstances involving employment related expenses tax refunds for a tax year that has ended are not given given back via the tax code of a later year.

If your Self Assessment liability reduced then you would have a credit on your Self Assessment account which could be repaid direct to you, it would never be included in your tax code.

aroominyork

Thanks, D&C. So just to clarify, a correction will be made after the banks submit their returns and a credit applied to SA account? There was a post a while back (I think from @masonic, so I hope I am not misquoting) saying that if you annually declare interest which really  should all be declared on maturity, HMRC are unlikely to pick it up.

masonic

aroominyork said:

If you self-assess and declare interest on a multi-year bond where the interest is not credited or accessible until maturity - imagine you pay a small amount of over-PSA tax each year rather than a large amount on maturity - will HMRC will send a corrected tax return after the banks send HMRC details of the interest they paid out? And will HMRC then refund or adjust your tax code to return the (small amount of) tax you incorrectly paid?

If the interest is neither credited nor accessible, then the bank would not report it to HMRC until maturity. Only banks that credit inaccessible interest annually (or some other frequency) would return interest that hasn't arisen. If you self-assess, and declare interest that hasn't even been credited your account, in order to declare less interest in a future tax year, then HMRC would be capable of identifying this from the returns it received from the relevant banks and could treat it as tax evasion if it resulted underpaid tax (as would be the case if you were a small amount over-PSA each year, rather than a lot over PSA at maturity, and I don't think you could claim it was accidental if you were declaring extra interest that wasn't credited to your account). Did you mean to say the interest was credited, but wasn't accessible?

If on the other hand, you had greater income in the earlier years, and paid some tax due to the incorrect declaration of interest, but receiving all of the interest at maturity would result in you paying no tax due to utilisation of PA and/or starter rate for savings, then the onus would be on you to amend your return. HMRC might see an apparent overpayment, but that can happen for a number of reasons, such as use of a concierge service, or other non-reporting account.

aroominyork said:

Thanks, D&C. So just to clarify, a correction will be made after the banks submit their returns and a credit applied to SA account? There was a post a while back (I think from @masonic, so I hope I am not misquoting) saying that if you annually declare interest which really  should all be declared on maturity, HMRC are unlikely to pick it up.

This comment was in relation to the scenario where interest was credited, but wasn't accessible, such that the self assessment value was in agreement with that sent by the banks (but both were wrong for tax).

Dazed_and_C0nfused

aroominyork said:

Thanks, D&C. So just to clarify, a correction will be made after the banks submit their returns and a credit applied to SA account? There was a post a while back (I think from @masonic, so I hope I am not misquoting) saying that if you annually declare interest which really  should all be declared on maturity, HMRC are unlikely to pick it up.

Well it depends on whether HMRC open an enquiry into your return.

I suspect that is less likely when the end result would be a reduction in tax due but they do do (or certainly used to do) random enquiries so not impossible.

But I wouldn't expect it be widespread, certainly not many people posting on here ever mention being subject to a HMRC enquiry.

zagfles

Which banks credit inaccessible interest? I've had a few multi year bonds which have paid interest at maturity, but I don't see any of the interest until maturity, so there is never any interest to declare until maturity.

I'd avoid any banks which credit inaccessible interest! What is the point? Yeah it compounds but you can account for that in the AER, which for multi year bonds which pay on maturity the AER will be less than the nominal rate.