Tax on interest not received because of early closure penalty

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  • talexuser
    talexuser Posts: 3,498 Forumite
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    My point was one of natural justice. To take the above example for simplicity, you start with 10 grand get 500 in interest you are taxed on, but only actually get 10250 back because of the penalty. Yes the capital may have been in the small print, but not in the headline penalty description that virtually 100% of people would never have realised the consequenses. Yes, it's buyer beware but someimes the law is an !!!!!! that just does not make common sense, and paying tax on income you never had is just that..
  • boingy
    boingy Posts: 1,326 Forumite
    First Post Name Dropper
    eskbanker said:
    boingy said:
    I'd have absolutely no qualms about declaring the actual amount I received on a tax return (not that I do tax returns any more). Let HMRC challenge it if they want to.
    Your choice, but few would recommend knowingly making false declarations to government agencies, regardless of flimsy rationalisations....

    It's all part of the game. Accountants all over the land routinely test the boundaries and usually get away with it. If HMRC disagree with your self-assessment they point out the errors and you pay the difference. Despite what they like you to think there is no penalty or fine or jail sentence at that point. That only happens if you continue to argue or delay making the extra payment. The truth is that they rarely challenge this stuff because they don't have the staff. Mostly they are just happy that you have submitted your self-assessment form on time. 
  • Olinda99
    Olinda99 Posts: 1,240 Forumite
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    eskbanker said:
    Olinda99 said:
    the problem is advertising literature or key facts the penalty is not stated in terms of a capital deduction - it clearly says you lose x days or months 'interest'

    it does not say you lose the equivalent of x days or months interest taken from your capital
    Please link to some products where the penalty is clearly stated as loss of interest rather than a charge equivalent to a certain amount of interest....
    certainly

    https://www.aldermore.co.uk/savings-accounts/personal-savings-accounts/cash-isas/fixed-rate-cash-isas/1-year-fixed-rate-cash-isa/?utm_medium=affiliate&utm_campaign=5511&utm_source=Moneyfacts.co.uk Limited&irclickid=xjtyO-1hBxyPUzWxlVyqYxb:UkFVqUyBA2rw2I0&irgwc=1

    Aldemore 1yr fixed rate ISA


     

    Can I withdraw money?

    • Yes, you can withdraw money from this tax year or previous tax years if you need to, subject to a deduction of 90 days' interest. 
  • eskbanker
    eskbanker Posts: 30,894 Forumite
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    Olinda99 said:
    eskbanker said:
    Olinda99 said:
    the problem is advertising literature or key facts the penalty is not stated in terms of a capital deduction - it clearly says you lose x days or months 'interest'

    it does not say you lose the equivalent of x days or months interest taken from your capital
    Please link to some products where the penalty is clearly stated as loss of interest rather than a charge equivalent to a certain amount of interest....
    certainly

    https://www.aldermore.co.uk/savings-accounts/personal-savings-accounts/cash-isas/fixed-rate-cash-isas/1-year-fixed-rate-cash-isa/?utm_medium=affiliate&utm_campaign=5511&utm_source=Moneyfacts.co.uk Limited&irclickid=xjtyO-1hBxyPUzWxlVyqYxb:UkFVqUyBA2rw2I0&irgwc=1

    Aldemore 1yr fixed rate ISA 

    Can I withdraw money?

    • Yes, you can withdraw money from this tax year or previous tax years if you need to, subject to a deduction of 90 days' interest. 
    Fair enough, but that's an ISA and therefore not within the scope of discussions about accounts on which interest is taxable....
  • sheramber
    sheramber Posts: 19,030 Forumite
    First Anniversary I've been Money Tipped! First Post Name Dropper
    IanManc said:
    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.
    In answer to your question, you are still under the misapprehension that there is an "interest penalty" and that you are paid interest and then "you lose half of that as a penalty". Neither is true.

    You are paid interest. It is taxable.

    You suffer a penalty for early withdrawal which is equivalent to X number of days interest. That is how the penalty is calculated. It doesn't reduce the interest you have been paid.

    Has the penny dropped yet?
    Penny still in the air.  I understand what you are confidently asserting but I'm still finding it hard to believe.  The nearest worked example I could find is here: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2440

    Example 2
    Sam entered into a five year fixed-term bond on 6 April 2017. The bond credits interest to Sam’s account annually on the 31 December. Sam can only gain access to both the annual interest and the principal in advance of 5 April 2022 if a penalty is paid for early access.
    Since the terms and conditions of the bond allow Sam to draw on the funds, although with a penalty, the interest arises and is taxable each year as it is credited.
    If the terms and conditions of the bond did not allow access until maturity, the interest would arise and be taxed at that point.  

    This was an ideal opportunity to mention how the penalty is treated for tax purposes, but they don't.

    The penalty is not taxable so is ignored for tax purposes.
  • sheramber said:

    The penalty is not taxable so is ignored for tax purposes.
    Of course the penalty is not taxable, the question is whether it is deductible.  In the UK no.  In the US I think yes it is.
    Reed
  • eskbanker
    eskbanker Posts: 30,894 Forumite
    First Anniversary Name Dropper Photogenic First Post
    talexuser said:
    My point was one of natural justice. To take the above example for simplicity, you start with 10 grand get 500 in interest you are taxed on, but only actually get 10250 back because of the penalty. Yes the capital may have been in the small print, but not in the headline penalty description that virtually 100% of people would never have realised the consequenses. Yes, it's buyer beware but someimes the law is an !!!!!! that just does not make common sense, and paying tax on income you never had is just that..
    I suspect that we're in diminishing returns territory (in more ways than one!) but you're paying tax on income you believed you never had if you failed to read and understand the product terms, which obviously isn't the same thing at all....
  • ColdIron
    ColdIron Posts: 9,007 Forumite
    First Anniversary Name Dropper Photogenic First Post
    edited 14 November 2023 at 8:18PM
    talexuser said:
    My point was one of natural justice.
    The principle of fair treatment? The duty to give someone a fair hearing?
    Banks that are regulated by the FCA are required to treat customers fairly
    You have also received a fair hearing by the FoS, an independent arbitrator
    To take the above example for simplicity, you start with 10 grand get 500 in interest you are taxed on, but only actually get 10250 back because of the penalty.
    Consider the case where you exit the arrangement after, say, a few weeks and have accrued very little interest. It would not be possible to pay the penalty from the interest. You could even get back less than you deposited
    Yes the capital may have been in the small print
    It was
    but not in the headline penalty description
    That's why T&Cs exist. Headline descriptions exist to give the retail customer a summary of the key points and not have to 'scan though the reams of small print' when all they want is enough to assess whether it's what they want
    that virtually 100% of people would never have realised the consequenses. 
    Are you sure about that? You've been on this forum longer than I and it's a familiar topic
    Yes, it's buyer beware but someimes the law is an !!!!!! that just does not make common sense,
    I have no axe to grind here and I sympathise with your predicament but the contractual agreement (that you confirmed) is clear and unambiguous
    and paying tax on income you never had is just that..
    At risk of repetition, you are not paying tax on income you never had, you are paying tax on the interest that you received
  • Olinda99 said:
    certainly

    https://www.aldermore.co.uk/savings-accounts/personal-savings-accounts/cash-isas/fixed-rate-cash-isas/1-year-fixed-rate-cash-isa/?utm_medium=affiliate&utm_campaign=5511&utm_source=Moneyfacts.co.uk Limited&irclickid=xjtyO-1hBxyPUzWxlVyqYxb:UkFVqUyBA2rw2I0&irgwc=1

    Aldemore 1yr fixed rate ISA


     

    Can I withdraw money?

    • Yes, you can withdraw money from this tax year or previous tax years if you need to, subject to a deduction of 90 days' interest. 

    Best I can find is here:  https://www.hsbc.co.uk/savings/savings-explained/
    What is a fixed rate savings account?

    If you have got long term savings goals in mind, a fixed rate savings account may be right for you. You may be able to get a higher rate of interest compared to an instant access savings account, but you’ll need to lock away your money for a set amount of time. This can be anything from 1 to 3 years, so it’s important to be sure you won’t need access to your savings during the term. If you do access your money, you may need to pay a fee, or receive a loss of interest.  
    Reed
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