Tax point on savings interest

Monanore

Further to my previous thread on this subject, I wonder if anyone else can throw any more light. 

Taking as an example a 3 year fixed rate bond with annual interest added to the account, where the funds are not normally accessible until maturity. We know that SAIM guidance says that interest theoretically ‘arises’ in year 3. 

The BBSI return requires reporting of interest which has been ‘paid or credited’ in the tax year, and institutions follow this rule and notify interest in all 3 years.  In practice HMRC charge PAYE taxpayers according to the figures in the return.

What experiences have you had with this issue ?

Ocelot

I've been charged every year for fixed rate bonds since 2016. The general consensus is that HMRC shouldn't do this, but they don't know if interest is available to you unless you inform them, which I intend to they next time I get a P800.

EthicsGradient

I pay by self assessment, and I reckon that HMRC has decided the policy is that the interest is not taxable, and thus should not be declared on a tax return, until it is accessible (this makes some sense - you shouldn't have to pay tax on income until the income is actually available to you to take the tax out of). The HMRC personnel on their forum who originally said "every year" have since recanted. The MSE advice takes this line too. I think that means that if the only time you could decide when the interest could be paid to you was when an account was opened, then if you chose "at the end", it's not taxable till then (you don't have records of what other options could have been available). If it's something that you can change in the middle of the account term, then it may "arise" each year. Exceptions for bankruptcy etc. are exceptions, and would be looked at only if they happen.

As you say, the BBSI reporting mechanism does not allow this to work properly, and that's HMRC's fault. That means HMRC is not following its own policy for PAYE payers, unless they apply the rules themselves and complain to HMRC. For the moment, this is Somebody Else's Problem.

Since I'm on the edge of paying tax on interest for the next few years, I have started arranging accounts (eg opening a 1 year account at the end of the 23-24 year, rather than a 2 year account at the start of 24-25) to keep the interest down in the one year in which I have a 3 year, interest-inaccessible account maturing. I will not put the first year of that 3 year bond on my 23-24 tax return I'm about to do, and will wait to see if HMRC uses a BBSI figure to dispute that - I suspect they won't, but I think if they do, they should see that it's their crappy system that would be at fault.

masonic

If you are filling out a tax return, then you should follow the arising method in the HMRC SAIM. I've never been challenged for potentially underreporting in earlier years and I suspect, despite the apparent confusion on their forums, HMRC are perfectly aware that the BBSI figures are flawed when applied to taxation.

Those who do not complete a tax return can probably plead ignorance and get away with sticking to HMRC's figures, and perhaps there is little chance of someone getting found out for declaring interest that hasn't arisen in their tax return, but I wouldn't chance it. The problem can be avoided by sticking to products or versions of products that do not credit unavailable interest. Either those that pay away or those that pay at maturity.

Notepad_Phil

masonic said:

...

Those who do not complete a tax return can probably plead ignorance and get away with sticking to HMRC's figures, and perhaps there is little chance of someone getting found out for declaring interest that hasn't arisen in their tax return, but I wouldn't chance it. The problem can be avoided by sticking to products or versions of products that do not credit unavailable interest. Either those that pay away or those that pay at maturity.

Unless the account t&c's stated that the interest is only taxable at maturity then I think even those who have to complete a tax return can plausibly plead ignorance - I'm aware of a few accounts that do state this, but from memory it is very rare to be specified, so I'm not at all surprised that most people are not aware.

Monanore

@masonic

"perhaps there is little chance of someone getting found out for declaring interest that hasn't arisen in their tax return, but I wouldn't chance it"

Hi - how could someone in PAYE possibly be blamed for declaring interest each year that you know is in the return which in past years HMRC themselves have used to include in the total in your P800 ?

masonic

Monanore said:

@masonic

"perhaps there is little chance of someone getting found out for declaring interest that hasn't arisen in their tax return, but I wouldn't chance it"

Hi - how could someone in PAYE possibly be blamed for declaring interest each year that you know is in the return which in past years HMRC themselves have used to include in the total in your P800 ?

Those on PAYE that do not submit a tax return are not currently required to declare savings interest. If they do so voluntarily, they ought to ensure the details they supply HMRC are accurate and in accordance with the tax rules.

HMRC have always taken the stance that ignorance of the tax rules is no defence. If they themselves have previously made a mistake in a P800 calculation, that doesn't make it correct to continue this practice. When you submit a tax return or provide HMRC with a voluntary declaration, you are attesting to the accuracy of its contents. 

I wouldn't expect HMRC to fine anyone for making an honest mistake, but they would charge interest at 8% on the underpayment if it were picked up in the future.

I see no reason to take any risks when products exist that legally allow interest to be taxed annually or at maturity as required.

Monanore

@masonic

Couple of points if I may -

Firstly, HMRC don't make a mistake as such; their permanent practice in all PAYE cases is to take the figures supplied and put them on the P800, which at the moment are all annual except for NS & I.

Secondly, you say to choose products that suit your requirement.  But as far as I know  product information does not cover the subject of 'arising'.  All you would get if you asked a building society is that they send the information annually as per their instructions from HMRC - "paid or credited".

Why should it be up to the taxpayer to cope with this, anyway?  What would he do if he's decided not to notify an amount in an early year and then gets a P800 with the amount on ?

masonic

Monanore said:

@masonic

Couple of points if I may -

Firstly, HMRC don't make a mistake as such; their permanent practice in all PAYE cases is to take the figures supplied and put them on the P800, which at the moment are all annual except for NS & I.

That is the mistake. Returns of interest credited cannot be used for tax when the interest wasn't available to the saver in that tax year. Yet HMRC wrongly assumes all interest credited was available. According to their own rules and tax law, this is wrong.

Monanore said:

Secondly, you say to choose products that suit your requirement.  But as far as I know  product information does not cover the subject of 'arising'.  All you would get if you asked a building society is that they send the information annually as per their instructions from HMRC - "paid or credited".

Product information must state how the interest is paid and when it is available to the saver. For multi-year fixed term savers, if the saver applies for an account where interest is added to the account and the saver cannot access it until the end of the term, then all of the interest is taxable at maturity. Banks and building societies provide sufficient information about their products for a saver to determine how to declare their interest. If there is a knowledge gap, then like other situations, information from reputable sources or professional advice may be sought out. It's been a topic of regular discussion both here and HMRC's forum. The bank or BS is quite right that they are merely responding to HMRC's request, and it is not for them to weigh in on matters of tax law. What banks and BS could do to make life easier for savers is not credit inaccessible interest in the first place. It would be very easy for them to credit all of the interest at maturity where it is not paid away, based on the same AER and an increased gross rate. This would make it crystal clear when interest had arisen.

Monanore said:

Why should it be up to the taxpayer to cope with this, anyway?  What would he do if he's decided not to notify an amount in an early year and then gets a P800 with the amount on ?

Why indeed. There are several simple solutions to this problem. The easiest of which for HMRC would be to ban crediting of unavailable interest, such that it is only paid away or credited at maturity. Alternatively, they could change the BBSI returns, although perhaps they use the information about credited interest for other purposes.

I don't understand what you mean by "decided not to notify". Only those who complete a tax return need to notify HMRC. If you submit a tax return, you will not receive a P800. Your tax return will be used to calculate what you owe.

If a taxpayer does not self-assess, then it is up to them whether or not to intervene when they receive a P800 from HMRC. Firstly, whether to check the calculation. I suspect very few do. I am aware of one instance where someone did so, then phoned HMRC to inform them some of the interest had not arisen, and was told HMRC couldn't do anything about it because that is what the bank in question reported! In that case they wanted to be taxed at maturity due to having a reduced income in the maturity year.

It is very easy to avoid all of this mess through judicious choice of product. For all multi-year fixed term accounts I've opened recently, I've had interest paid away. Prior to that, I had accounts that credited interest that had not arisen and dealt with that in my tax return (declaring it all at maturity) with no comeback (I am a PAYE taxpayer, and also signed up for SA - my only untaxed income is interest).

Bobziz

@masonic said:

"I am aware of one instance where someone did so, then phoned HMRC to inform them some of the interest had not arisen, and was told HMRC couldn't do anything about it because that is what the bank in question reported!"

I phoned and was told that I would need to provide evidence that interest had not arisen.

I'll let you know how I get on !

Monanore

@masonic

I wouldn't expect HMRC to fine anyone for making an honest mistake, but they would charge interest at 8% on the underpayment if it were picked up in the future.

Am I right in thinking the only time an underpayment would exist is if in the final year the amount pushed you into a higher rate, otherwise the interest is surely the same ?  So how would this be identified and who would do the work, bearing in mind the year(s) affected will have been agreed and signed off ?

For all multi-year fixed term accounts I've opened recently, I've had interest paid away.

But surely you then lose the compounded interest ?

Banks and building societies provide sufficient information about their products for a saver to determine how to declare their interest.

I don't think it's that simple. For instance, I saw a post from someone who had contacted Coventry BS and was told that Coventry had agreed with HMRC that an account of this type's interest was charged to tax annually.

Also I think you yourself in a previous post ( 2023, but I can't find it again ) said that accounts where the option to pay away existed but was not taken up could qualify for charging annually.

Yet HMRC wrongly assumes all interest credited was available. According to their own rules and tax law, this is wrong.

A lawyer would make a mockery of HMRC telling a taxpayer that he was at fault for declaring interest in exactly the same way as they themselves used on their final calculation, agsreed and signed off after year end !