Tax on interest not received because of early closure penalty

LHW99

subjecttocontract said:

Ho, ho, ho .....if that's the case I suspect that is not widely known and a I also suspect that a very large number of savers who expose themselves to these penalties don't accurately declare their interest payments ! Another anomaly in the tax process. Let's make a list:
1. Interest payments on multi year accounts......Nobody really knows what's going on here.
2. Interest declaration on platform account providers (e.g. Raisin)...... HMRC not advised automatically.
3. Penalty on early termination .......possibly dealt with incorrectly.
We almost need another forum just for tax matters

Maybe on here?

https://forums.moneysavingexpert.com/categories/cutting-tax

eskbanker

subjecttocontract said:

Ho, ho, ho .....if that's the case I suspect that is not widely known and a I also suspect that a very large number of savers who expose themselves to these penalties don't accurately declare their interest payments ! Another anomaly in the tax process. Let's make a list:
1. Interest payments on multi year accounts......Nobody really knows what's going on here.
2. Interest declaration on platform account providers (e.g. Raisin)...... HMRC not advised automatically.
3. Penalty on early termination .......possibly dealt with incorrectly.
We almost need another forum just for tax matters

Personally I don't see item 3 as being particularly similar to 1 and 2, which do both involve inconsistency of information provided by HMRC and/or institutions.  To the best of my knowledge, early closure penalties have never reduced the amount of interest paid - undoubtedly there will be some who've never spotted that in product terms or tax certificates and have made their own rules up about what to declare, but IMHO that's not an anomaly as such in the way that the other two issues are.

Barkin

subjecttocontract said:

 I also suspect that a very large number of savers who expose themselves to these penalties don't accurately declare their interest payments ! 

[...]

3. Penalty on early termination .......possibly dealt with incorrectly.

Possibly, but I wouldn't think it'd be "a very large number of savers" because - as already mentioned - it's mainly ISA's that allow penalised withdrawals/closure of fixed term accounts. 

Reed_Richards

Okay, suppose I take a job as a Santa Claus in a store.  I sign on for the six weeks up to Xmas for £1000 per week.  After 3 weeks it all gets too much and I quit without notice but a clause in my contract means that I forfeit a week's wages for so-doing so I am only paid for 2 weeks.  Do I pay income tax on the £6000 I contracted to earn, the £3000 I earned before the penalty clause or the £2000 I actually got?  This is an analogous situation but applied to earned income rather than interest.    

Johnjdc

Reed_Richards said:

Okay, suppose I take a job as a Santa Claus in a store.  I sign on for the six weeks up to Xmas for £1000 per week.  After 3 weeks it all gets too much and I quit without notice but a clause in my contract means that I forfeit a week's wages for so-doing so I am only paid for 2 weeks.  Do I pay income tax on the £6000 I contracted to earn, the £3000 I earned before the penalty clause or the £2000 I actually got?  This is an analogous situation but applied to earned income rather than interest.    

If you forfeit the week's pay, you don't pay tax on it.

If you get the week's pay, but they sue you in the small claims court and you're ordered to pay it to them as compensation, you do.

subjecttocontract

Barkin said:

subjecttocontract said:

 I also suspect that a very large number of savers who expose themselves to these penalties don't accurately declare their interest payments ! 

[...]

3. Penalty on early termination .......possibly dealt with incorrectly.

Possibly, but I wouldn't think it'd be "a very large number of savers" because - as already mentioned - it's mainly ISA's that allow penalised withdrawals/closure of fixed term accounts. 

Agreed but, I don't expect the numbers involved with any of the 3 issues are particularly large compared to the total of individual tax payers. It just seems to me that this web site have stumbled on these 3 issues in the past couple of weeks and any of them could easily be clarified/resolved by HMRC. I guess it's unreasonable to expect any system to be error free. 

AmityNeon

Reed_Richards said:

wmb194 said:

Oldhag2 said:

I've just joined MSE and this is my first post.  I am doing my tax return and have seen that a building society (on the end of year statement) showed the interest that I WOULD have received had I not closed the account and paid the early closure loss of interest penalty.  If I declare this number I will end up paying tax on interest that I have not received!  Has anyone experienced this?

Or is it showing interest you DID receive but then you've been charged a penalty? I.e. you received it but then paid a penalty to withdraw it early. These penalties aren't tax deductible.

I disagree.  The penalty you pay is always (AFAIK) a loss-of-interest penalty.  You pay tax on the interest you actually received, not the interest you would have received if you had not made an early closure.

If the bank pays you £100 in gross interest and reports that figure to HMRC, then that is amount of taxable income you received; that you happened to pay a separate penalty from your net capital is irrelevant. If you close the account immediately (resulting in virtually no gross interest received), would you still have to pay the same penalty?

Reed_Richards

Suppose you have an account that pays interest annually on 1st November but is subject to a 6 month interest penalty for early closure.  It almost looks as if:

1. You close your account on 31st October.  You pay tax on half a year's worth of interest credited to your account on closure
2. You close your account on 2nd November.  A full year's interest was credited to your account the previous day.  You lose half of that as a penalty but, if what others say is true, you are taxed on all of it.

This seems grossly unfair but if you are taxed on interest when it arises and penalties are not tax deductible then this is what would happen.

Reed_Richards

@IanManc so you agree with my post made at 3:10 pm?  

Olinda99

you would treat the penalty as a capital loss for cgt purposes (can be carried forward)