Fixed Bond Interest Tax Bill Despite Interest Not Being "Accessible"

TheGreenFrog

I agree it is a very unsatisfactory situation.  But if you take out an NS&I Guaranteed Growth Bond with a maturity of more than a year, NS&I are very clear that although the interest gets credited to your bond annually, it is capitalised so you cannot withdraw it and it is not reportable until maturity of the bond.  See for example:  https://www.nsandi.com/products/guaranteed-growth-bonds

Albermarle

karl10247 said:

So I've spoken to around 6 different HMRC advisors over the instant message chat now. All but one seemed to think you must pay tax on interest even if it remains locked away in a multi-year fixed term only accessible at maturity. Also, following the advice from HMRC I contacted each of my fixed term banks and asked them not to report annual interest that was not accessible to me - I'm sure you can guess how that went down. They informed me they have a legal responsibility and must keep reporting on an annual basis. Only ONE bank offered to provide a letter for the HMRC stating the interest reported was not made available to me. Given that this mess will repeat year on year and will get very confusing and stressful I contacted HMRC a final time and decided to bite the bullet and pay my tax annually - not easy when you haven't actually received the income you need to pay tax on! I will also have them reset my tax code and likely submit a self assessment 2024/2025 onwards.

This is a systemic issue and not one that i can fix. The banks advertise multi-year fixed bonds with compounding interest only accessible at maturity and here on MSE you'll read "only pay tax on interest accessible to you" however each of 6 different banks have told me they must report the interest earned each year and it will count as taxable income.

I wont be taking out any more multi-year fixed term bonds again, its been too stressful and taken a lot of time to resolve. For any tax-efficient savers out there who intend on taking out multi-year bonds with the hope of paying all the tax at maturity (which might suit there situation), DONT! No matter how careful you read T&Cs and select your banks they will report the interest each year as a taxable income received.

Thanks for reporting your 'research' 
In fact the yearly reporting has suited me recently from a tax point of view as it has meant I have fully utilised the £1000 savings allowance each year. Whereas if all the interest had been reported after three years, I would have paid more tax.
I do not fill in a SA, so I just let sleeping dogs lie.
However other forum members do fill in SA's and do report interest on maturity, as is supposed to be the HMRC rule.
Presume this means they have to call HMRC to put their records straight. If they get one of the advisors you did, then that could be tricky.

refluxer

TheGreenFrog said:

I agree it is a very unsatisfactory situation.  But if you take out an NS&I Guaranteed Growth Bond with a maturity of more than a year, NS&I are very clear that although the interest gets credited to your bond annually, it is capitalised so you cannot withdraw it and it is not reportable until maturity of the bond.  See for example:  https://www.nsandi.com/products/guaranteed-growth-bonds

I'm sure I've read fixed rate account T&Cs and advice from other banks and building societies who also repeat the official HMRC rules on this yet they still report credited interest to HMRC at the end of every tax year regardless, in which case anyone wishing to stick to the official rules is going to be fighting to do this every year.

Posts in this similar thread suggest that anyone wishing to do this will have to send HMRC proof that the interest was inaccessible presumably because, in the initial years of a multi-year fixed rate account, their own supplied figures will be a fair amount less than the figures reported to HMRC by the banks. It's a mess, for sure.

https://forums.moneysavingexpert.com/discussion/6523768/declaring-savings-interest-practicalities/p1

zagfles

I've had a few multi year fixed term accounts and they've all paid interest at maturity only, not annually. Just look for those sorts of account to avoid all this BS, and use the AER to compare rates. Mine have been through HL active savings. 

TheGreenFrog

zagfles said:

I've had a few multi year fixed term accounts and they've all paid interest at maturity only, not annually. Just look for those sorts of account to avoid all this BS, and use the AER to compare rates. Mine have been through HL active savings. 

The problem I have encountered is that different banks seem to have different definitions of the term "paid".  Some state that they pay annually and on maturity when in fact what they do on interest payment dates prior to maturity is capitalise the interest - not my definition of a payment.  NS&I capitalise the interest annually as well, and it shows up on the annual statement, but they do not pretend that they are paying you the interest.  I seem to recall that NS&I only started adopting this correct procedure a few years ago (presumably soneone spotted that as a national deposit taker they should follow the law).

zagfles

TheGreenFrog said:

zagfles said:

I've had a few multi year fixed term accounts and they've all paid interest at maturity only, not annually. Just look for those sorts of account to avoid all this BS, and use the AER to compare rates. Mine have been through HL active savings. 

The problem I have encountered is that different banks seem to have different definitions of the term "paid".  Some state that they pay annually and on maturity when in fact what they do on interest payment dates prior to maturity is capitalise the interest - not my definition of a payment.  NS&I capitalise the interest annually as well, and it shows up on the annual statement, but they do not pretend that they are paying you the interest.  I seem to recall that NS&I only started adopting this correct procedure a few years ago (presumably soneone spotted that as a national deposit taker they should follow the law).

They should state whether they pay to the account or outside the account. If to the account and annually then you'll have a problem, and perhaps should avoid those accounts. 

masonic

Albermarle said:

However other forum members do fill in SA's and do report interest on maturity, as is supposed to be the HMRC rule.

Presume this means they have to call HMRC to put their records straight. If they get one of the advisors you did, then that could be tricky.

I'm one of those who fills SA's and have never had any contact from HMRC despite my declarations contradicting the banks'.

I no longer have any multi-year fixed accounts that don't either pay away interest or credit all of it at maturity, and won't open another.

TheGreenFrog

For amusement, below is an extract from an NS&I guaranteed growth bond statement received in April 2021, less than a year after the GGB was purchased:

Important change to how your Bond earns interest for income tax purposes. For our 2, 3 and 5-year Guaranteed Growth Bonds that are purchased or renewed on or after 1 May 2019, all interest will be treated as being received in the year in which the Bond matures. This is different to how interest was treated for previous issues, where interest was treated as being received annually. If you're not sure if the Bond will be suitable for you, or how the change in how interest is received affects your circumstances, you should check with HM Revenue and Customs (HMRC) or seek professional financial advice. Tax information You may notice that your statement shows no interest has been earned on your Bond within the tax year 5 April 2021. Don't worry, this is because your interest is calculated daily and will be added to your Bond on each anniversary of investment.

Albermarle

Article in the media, not entirely accurate.
HMRC sent tax demand for my fixed savings account - even though I won't be paid the interest until it matures | This is Money

TheGreenFrog

Albermarle said:

Article in the media, not entirely accurate.
HMRC sent tax demand for my fixed savings account - even though I won't be paid the interest until it matures | This is Money

Interesting, especially as one of the experts seems to be of the view that the banks can choose whether rolled up interest is taxable when capitalised or when paid out.