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When you pay tax on savings, just spoken to HMRC

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  • masonic
    masonic Posts: 27,236 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    edited 12 November 2023 at 5:48PM
    zagfles said:
    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.
    In short, the majority of top payers do it. I did a rundown of those listed at the top of moneyfacts' 5 year rate tables previously, here: https://forums.moneysavingexpert.com/discussion/comment/80330167/#Comment_80330167
    masonic said:
    <snip detailed analysis>
    Overall, the breakdown is:
    • must compound, pay annually/monthly (6 providers);
    • offer compounding and pay-away variants, compounding variant pays annually/monthly (13 providers); 
    • all interest credited at maturity (3 providers)
    I've opened dozens of multi-year fixes over the years. I've not held one that didn't credit interest either monthly, quarterly or annually (I'm aware NS&I credit at maturity, but didn't bite). Most but not all had pay-away variants, and it's these that I always go for now having understood the tax issue. Moneyfacts helpfully lists details of the interest options in the "View Further Details" popout, for example, for the current top 5 year fix:

    I agree with you on the pointless nature of crediting inaccessible interest. The practice could be banned and this would have no discernable drawback. As you say, the gross rate would be a little higher to achieve the same AER, just as a monthly paying account's gross rate is lower.
  • zagfles said:
    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.
    SmartSave - they have confirmed this to me. I believe we did start a list somewhere, and it's several, including well-known names.

    The thing is, HMRC's own personnel are confused about this, so it's not surprising that banks would be too, or that some haven't worked out (or haven't decided it's definite) that crediting, and therefore reporting, inaccessible interest each year (which would, for most savers, currently be advantageous, making the potential tax paid smaller by using more than one year's allowance) doesn't actually affect the tax owed, in theory.

    However, for those who don't do self-assessment, HMRC is likely to use the reports from the banks, to the advantage of more of their customers. So you could just say that these banks are doing what is likely to be better for more of their customers, because HMRC have a crappy system.
  • zagfles
    zagfles Posts: 21,443 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    zagfles said:
    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.
    SmartSave - they have confirmed this to me. I believe we did start a list somewhere, and it's several, including well-known names.

    The thing is, HMRC's own personnel are confused about this, so it's not surprising that banks would be too, or that some haven't worked out (or haven't decided it's definite) that crediting, and therefore reporting, inaccessible interest each year (which would, for most savers, currently be advantageous, making the potential tax paid smaller by using more than one year's allowance) doesn't actually affect the tax owed, in theory.

    However, for those who don't do self-assessment, HMRC is likely to use the reports from the banks, to the advantage of more of their customers. So you could just say that these banks are doing what is likely to be better for more of their customers, because HMRC have a crappy system.
    It's not necessarily better for most, for instance people saving for retirement in a few years time, may have a pension income then of £12k or so, and so potential for up to £6k of tax free interest, whereas now they only have £1k or even just £500 PSA.

  • zagfles said:
    zagfles said:
    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.
    SmartSave - they have confirmed this to me. I believe we did start a list somewhere, and it's several, including well-known names.

    The thing is, HMRC's own personnel are confused about this, so it's not surprising that banks would be too, or that some haven't worked out (or haven't decided it's definite) that crediting, and therefore reporting, inaccessible interest each year (which would, for most savers, currently be advantageous, making the potential tax paid smaller by using more than one year's allowance) doesn't actually affect the tax owed, in theory.

    However, for those who don't do self-assessment, HMRC is likely to use the reports from the banks, to the advantage of more of their customers. So you could just say that these banks are doing what is likely to be better for more of their customers, because HMRC have a crappy system.
    It's not necessarily better for most, for instance people saving for retirement in a few years time, may have a pension income then of £12k or so, and so potential for up to £6k of tax free interest, whereas now they only have £1k or even just £500 PSA.

    Few people are within a few years of retirement. Hence I said "most", not "all".
  • Curls2208
    Curls2208 Posts: 210 Forumite
    Eighth Anniversary 100 Posts
    edited 13 November 2023 at 9:00AM
    Dumb dumb question coming up sorry -With stoozing back, high interest rates and a slight pay rise *. I'll be in the tax zone for savings this year (or maybe next when its paid). Do I need to do anything, or will HRMC chase me? I'd rather the latter, i don't want to get in trouble for naivety. 

    *Cutting my tax free savings in half!!! :O 
  • Is it NOT for consideration that if a saver puts money into a 5 year fixed rate bond where the interest is paid on maturity that if the tax rate in years one to four was 20% but year 5 was 25% the saver would be worse off?

    I for one do NOT put money other than ISAs into fixed rate accounts of more than 1 year
    Butt Spelle Chequers Two Khan Make Awe Full Miss Steaks
  • Beddie
    Beddie Posts: 1,012 Forumite
    Part of the Furniture 500 Posts Photogenic Name Dropper
    Curls2208 said:
    Dumb dumb question coming up sorry -With stoozing back, high interest rates and a slight pay rise *. I'll be in the tax zone for savings this year (or maybe next when its paid). Do I need to do anything, or will HRMC chase me? I'd rather the latter, i don't want to get in trouble for naivety. 

    *Cutting my tax free savings in half!!! :O 
    HMRC will send you a revised tax code, for the following tax year, to collect the tax owed on interest. You only have to do a tax return if you get more then £10k in interest in a tax year.

    So no, don't do anything apart from keeping a record of all the interest received, so you can check their figures if necessary.
  • eskbanker
    eskbanker Posts: 37,182 Forumite
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    Is it NOT for consideration that if a saver puts money into a 5 year fixed rate bond where the interest is paid on maturity that if the tax rate in years one to four was 20% but year 5 was 25% the saver would be worse off?
    Worse off than what?  Higher tax would impact all savers, i.e. the saver in this hypothetical situation will be paying the higher rate of tax on interest on their money in year five, regardless of whether they use fixed term or easy access accounts....
  • eskbanker said:
    Is it NOT for consideration that if a saver puts money into a 5 year fixed rate bond where the interest is paid on maturity that if the tax rate in years one to four was 20% but year 5 was 25% the saver would be worse off?
    Worse off than what?  Higher tax would impact all savers, i.e. the saver in this hypothetical situation will be paying the higher rate of tax on interest on their money in year five, regardless of whether they use fixed term or easy access accounts....
    Would you NOT be paying 25% tax on the whole interest over five years whereas if interest was paid each year the tax deducted would be 20% for years one to four and only 25% for year five?
    Butt Spelle Chequers Two Khan Make Awe Full Miss Steaks
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