Working Out Interest On Taxable Savings Each Financial Year

HUMBUG

Say I have a savings account £10k  fixed at 5% for 2 years , with interest paid 7th April 23 and
7th April 24 (date of maturity). The terms and conditions of my savings account allows me access to my savings but I'd have to pay a penalty of 180 days loss of interest on any amount taken out.

Example
Interest for financial year 23/24 will be  £500  taxed at 20% (ie. I am on the Basic Rate) = £100.

But can I reduce that tax by the 180 day penalty I would have to pay for accessing that interest as income?

So for example:   (180/365) x 5.0 = 2.47% of 500 = £12.35 would be the penalty.

Therefore, I would receive £500 -£12.35 = £487.65 

Tax would be equal to 20% x 487.65 = £97.53 

Dazed_and_C0nfused

In a word, no.

Angelica123

Your calculation is wrong - if you are losing 180 days of interest, than it mean you only getting approx half the amount of interest in that year. It's not 2.47% of £500 - it's 180/365 of the 5% interest on £10k = 180/365 x 5/100 x 10k= £245 penalty leaving with you with £255 interest.

You would end up worse off even if it meant avoiding being taxed. In your example, you may pay slightly less tax but you still end up with less overall interest - £400 vs £390

Also remember that you only get taxed on the interest earned above the PSA. If you are a BR tax payer that is £1000. So if that fixed saver was the only source of interest then you wouldn't be taxed. 

Descrabled

I think you will receive the full amount of interest and separately a penalty. The penalty doesn't reduce the amount of interest. The full interest paid will be reported to HMRC without any reduction for the penalty.

jimjames

If you're on basic rate tax and have £500 interest then you won't pay any tax until you've earned over £1000 interest each year. 

eskbanker

HUMBUG said:

The terms and conditions of my savings account allows me access to my savings but I'd have to pay a penalty of 180 days loss of interest on any amount taken out.

The wording is normally carefully constructed to emphasise that the penalty is equivalent to n days interest, rather than being an actual loss of interest as such, hence the comment above about how it doesn't reduce taxable interest - which product are you referring to?

HUMBUG

eskbanker said:

HUMBUG said:

The terms and conditions of my savings account allows me access to my savings but I'd have to pay a penalty of 180 days loss of interest on any amount taken out.

The wording is normally carefully constructed to emphasise that the penalty is equivalent to n days interest, rather than being an actual loss of interest as such, hence the comment above about how it doesn't reduce taxable interest - which product are you referring to?

On reflection , I am looking at some of my fixed rate savings accounts which are 'Bonds' and they don't seem to allow any withdrawals before maturity date. 

'Descrabled' has already answered my question but thanks for your reply.